The Australian Financial Review

Tuesday 12 April 2011

How to end the super penalty trap

By ROBERT JEREMENKO*

Senior Tax Counsel

The Tax Institute

If an element of the tax system is so complex that it trips up a Minister of the Crown, you know it’s time to reform it.

Assistant Treasurer Bill Shorten highlighted this with a brutally frank public admission about his personal finances at The Tax Institute’s National Convention in Brisbane recently.

“I had to pay excess contribution tax so I’m more than sympathetic, I’m annoyed,” Mr Shorten said in a question about anomalies in tax legislation.

I’m not unfairly singling out Shorten by; I’m just making the point that he has been inadvertently caught out by this savage piece of law - just like 30,000 other taxpayers last year. Shorten has signalled he “gets it” and is in a position to do something to reform this unfair tax.

The treatment of excess superannuation contributions has been an area of concern for tax professionals since the current regime was introduced in May, 2006. Since then it has had a significant impact on many ordinary Australians diligently planning for their retirement.

The Government’s policy intent is clear: put a limit on the amount a person can contribute to superannuation each year so they can’t simply load up and enjoy a tax holiday at the end of their working life. It has imposed caps on contributions and if you exceed them, tax is imposed.

But here’s where the going gets tough. The tax on excess contributions can be up to 93% of the contribution. This in itself is harsh by other countries’ standards, but the kicker is that an excessive contribution can arise quite easily and there is virtually no method of redress.

The Commissioner of Taxation has discretion to disregard or reallocate contributions where there are “special circumstances”.

This discretion has unfortunately been interpreted very narrowly and it only appears to have been exercised in the most extreme cases of misfortune. Simple errors don’t cut it and don’t receive any sympathy from the Commissioner.

For example, someone with more than one employer might breach the cap by being subject to multiple compulsory superannuation guarantee contributions. Such an employee has no way of currently avoiding the excess contributions tax.

A taxpayer might also find that they have breached a cap where their employer pays a contribution out of cycle and does not fit within their own retirement planning strategy.

Imposing a tax of up to 93 percent is extremely harsh. It’s like gang-tackling a footballer in the in-goal area after they’ve grounded the ball over the try line, only in this instance, history shows that the referee (that is the Commissioner) is unlikely to act.

The Tax Institute wants the Government to police the amount of money that goes into superannuation by rejecting contributions in excess of the cap.

Don’t allow excessive contributions in excess to be made in the first place and the harsh penalties mostly won’t be required.

Structuring the rules this way makes a lot more sense. Taxpayers would then be safe in the knowledge that they can contribute up to the cap, but if by mistakenly went over, the excess money would be returned to them.

Taxpayers engaging in tricky schemes that are trying to meddle with the contributions caps should be penalised, but let’s not take such penalties to a level where the innocent are condemned to large bills.

Rules to reject excessive contributions can be combined with other integrity measures to ensure that the government’s policy of limiting the amount of money that can be contributed to superannuation are effectively policed.