Exceeding concessional contribution caps in a Self-Managed Super Fund (SMSF) is a situation that many trustees face, often unexpectedly. Whether it’s due to a redundancy payout, a bonus, or simply an oversight, understanding your options for managing these excess contributions is crucial – not just for financial planning, but for audit compliance, as well.
What happens when you exceed the concessional cap?
When concessional contributions exceed the annual cap, the ATO is quick to identify the breach. This is done through a comparison of the individual’s tax return and the super fund’s reporting. Once the excess is detected, the ATO sends a notice to the member, automatically amending the tax assessment to include the excess contributions as assessable income.
These excess contributions are then taxed at the individual’s marginal tax rate, with a 15% tax offset applied to account for the contributions tax already paid by the super fund. This adjustment is handled automatically, and the member is required to pay the difference through their personal tax assessment.
Key options for managing excess contributions
If you receive a notice from the ATO regarding excess contributions, there are two primary options for managing the overage:
- Request a refund of excess contributions: Members can ask the trustee of their SMSF to release the excess contributions back to the ATO. This is done by nominating the trustee to release the funds through SuperStream after receiving a release authority from the ATO. The ATO will then withhold the necessary amount to cover the tax liability, with the remaining balance returned to the member. This option is particularly useful if the member needs liquidity to cover tax obligations or avoid further contributions breaching the non-concessional cap.
- Leave the contributions in the fund: If the member decides not to release the excess contributions, they will remain in the fund and count towards their non-concessional cap. This could be a strategic choice if there’s no risk of breaching the non-concessional cap and the member prefers to leave the money in super to benefit from its concessional tax environment.
Consideration for audit compliance
Excess concessional contributions have implications during your SMSF’s audit. The auditor will verify that contributions are reported correctly and aligned with the fund’s financial statements. If excess contributions are not managed appropriately, it could result in compliance breaches that may require rectification.
Additionally, if you opt for a reserving strategy where contributions are allocated in the following financial year, it must be documented and executed properly to meet ATO guidelines. Auditors will review these strategies closely to ensure there is clear evidence of the trustee’s decision and appropriate fund resolutions.
Reserving strategies
For contributions made late in the financial year, SMSFs have the option to utilise a reserving strategy. This involves temporarily holding the contribution in reserve, deferring its allocation to the member’s account until the next financial year. This strategy can help manage contribution caps effectively, but it must be done in strict compliance with ATO regulations and clearly documented for audit purposes.
Making the right choice
Exceeding concessional contribution caps is not ideal, but there are effective ways to manage the situation without compromising your fund’s compliance. Whether you choose to refund the excess or leave it in the fund, understanding your options and their audit implications is essential for smooth fund management. Consulting with an SMSF specialist and ensuring your documentation is thorough can help navigate this process confidently and ensure compliance.
Please contact our team if you have any queries.