It’s time to remove penalty tax on excess super contributions

It's time the government reviewed the legislation of applying the highest marginal tax rate on excess contributions. The current system is unfair and harsh and penalises people for making honest or unintentional mistakes when making contributions to super, caused by a confusing and complex superannuation system which is always changing through government manipulation to the rules.

The current system sees concessional contributions, or those contributions where a tax deduction is claimed, taxed at 15% when made to a super fund. The contribution cap limit from 1 July 2012 is $25,000 p.a. If a person exceeds this limit then an additional 31.5% is deducted from the contribution.

Non-concessional contributions, or those contributions where no tax deduction is claimed, can be contributed tax-free up to $450,000 over a 3 year time frame if you are under 65, or $150,000 p.a. if you are over 65 and eligible to make a contribution. If you exceed this cap then the excess is taxed at 46.5%. If you had excess concessional contributions they are included in your non-concessional cap.

The issue with excess contributions is that no-one deliberately goes about making an excess contribution. Excess concessional contributions are caused mostly because of timing differences of salary sacrifice contributions made by employers in a different year to when they actually apply to the employee. Excess contributions made by self employed people are caused mostly because of their ignorance of the cap limit, changes in legislation or in mismanagement of their contributions during the year. Is it right these people should effectively be taxed at the highest marginal tax rate on the excess contributions?

A fairer system would be for the excess contributions to be automatically included in their personal assessable income and taxed at their marginal tax rate and not the government's highest marginal tax rate. Everyone would agree that excess contributions should not receive any preferential tax concessions but why should they be penalised above and beyond their normal marginal tax rate?

As far as excess non-concessional contributions are concerned, why should these be taxed at all? These contributions are coming from a source where tax has already been paid or no deduction is being claimed. Who in their right mind deliberately intends to contribute more than the cap limit so they can pay 46.5% on the excess?

If the government wants to limit the amount of contributions being made to super to limit the tax free income in retirement, then why not just have excess non-concessional contributions returned? Is there really a need to tax people on contributions that have come from a tax free source?

it's time to stop penalising people for unintentional mistakes. It's not the people who are making the excess contributions who are at fault but the complex legislation which is creating timing differences and confusion surrounding the whole concept of contribution caps.


Rob Bourne has been involved in the financial services industry for over 35 years. As a practising financial adviser he focuses on the need for practical and down to earth financial education. The aim is to educate people through financial education so they can take control of their own financial future. Visit Rob's website here for more information on business opportunities, investing and financial education or the complete guide to superannuation a...

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