Contributed by Joseph Cheung, Lawyer and Daniel Butler, Director, DBA Lawyers
Contributions made in excess of an individual’s concessional contributions cap can give rise to extra tax payable and a liability to excess concessional contributions (“ECC”) charge for the individual. This article highlights how the ECC charge operates. Note that the law in this area is complex and a detailed and careful analysis is required to properly understand how the ECC system operates.
Background: tax on ECC and entitlement to offset
Before considering the ECC charge, it is useful to consider the general tax treatment of an ECC. Section 291-15 of the Income Tax Assessment Act 1997 (ITAA 1997) states that where an individual has ECC for a financial year (“FY”):
- • an amount equal to the ECC is included in the individual’s assessable income for the corresponding FY, and
- • the individual is entitled to a tax offset for that FY equal to 15% of the ECC.
Consider the following example:
In the year ending 30 June 2018, Bob’s concessional contributions cap is $25,000, his concessional contributions total is $35,000 and he has $10,000 of ECC.
Thus, an amount of $10,000 is included in Bob’s assessable income for FY 2018. Bob is entitled to a tax offset equal to $1,500 (being 15% of $10,000) for FY 2018.
Purpose of the ECC charge
Individuals who made excess concessional contributions could benefit from tax advantages. This is because the ECC were not subject to the pay as you go rules. Moreover, earnings from ECC were retained in a concessionally taxed superannuation environment. To negate these benefits, the ECC charge was introduced in mid-2013.
Liability to ECC charge
Where the inclusion of an amount equal to the individual’s ECC results in an increase in their tax liability, the individual will be liable to the ECC charge. Section 95-10 of Sch 1 to the Taxation Administration Act 1953 (“TAA”) sets out the methodology to determine whether an individual is liable to ECC charge. The following broadly summarises the main questions to ask when applying the methodology:
- 1. Does the individual have ECC for a FY?
- 2. Is the individual liable to pay an amount of tax for the corresponding FY?
- 3. Does the individual’s actual tax exceed the amount of tax they would be liable to pay for the FY if the ECC were disregarded? If the individual would not be liable to pay tax for the FY and if the ECC were disregarded, this question is modified as follows: Does the individual’s actual tax exceed a liability to pay a nil amount of tax?
If the answer to all three questions is “yes”, the “excess” (as calculated under question 3) is an amount of tax on which the individual is liable to pay ECC charge. This is illustrated in the following example:
Steve is an Australian tax resident and has taxable income of $87,000 and ECC of $10,000 for FY 2018.
Question 1: Does the individual have ECC for a FY? The answer is “yes”, Steve has ECC of $10,000 for FY 2018.
Question 2: Is the individual liable to pay an amount of tax for the corresponding FY?
Steve’s taxable income for FY 2018 is $97,000 ($87,000 + $10,000 ECC). The tax payable on $97,000 of taxable income (not including the Medicare levy) is: $23,522. (Note: For taxable income in the range from $87,001 to $180,000, the tax on this income, not including the Medicare levy, is $19,822 plus 37 cents for each $1 over $87,000.)
Steve’s only tax offset is the ECC tax offset, which is calculated to be 15% of the ECC, ie 15% of $10,000 = $1,500. Accordingly, the income tax payable on Steve’s taxable income including ECC less tax offsets is $23,522 − $1,500 = $22,022.
The answer is “yes”, Steve is liable to pay an amount of tax of $22,022 for the corresponding FY.
Question 3: Does the individual’s actual tax exceed the amount of tax they would be liable to pay for the FY if the ECC were disregarded?
If Steve’s ECC were disregarded, Steve’s taxable income for FY 2018 would be $87,000. The actual amount of tax on $87,000 would be $19,822. If the ECC is disregarded, the ECC tax offset is also disregarded. Accordingly, the income tax payable on Steve’s taxable income if Steve’s ECC were disregarded is $19,822.
The answer to question 3 is “yes”, Steve’s actual tax ($22,022) exceeds the amount of tax that he would be liable to pay for the FY if the ECC were disregarded ($19,822).
As the answer to all three questions is “yes”, the “excess” of $2,200 (being the difference between $22,022 and $19,822) is an amount of tax on which the individual is liable to pay ECC charge.
For completeness, we note that where an individual is not liable to pay an amount of tax for the corresponding FY (even after the inclusion of the ECC in their taxable income), they are not liable to pay any ECC charge.
Period for which ECC charge is payable
The liability for the ECC charge begins on the first day of the FY and ends on the day before the day on which tax under the individual’s first notice of assessment (“NOA”) for that FY is due to be paid, or would be paid if there were any to pay (TAA s 95-15(3)).
Amount of ECC charge
Section 95-15 of the TAA states the methodology to calculate the amount of ECC charge. Broadly, the ECC charge for a day is calculated by multiplying the rate worked out under s 4 of the Superannuation (Excess Concessional Contributions Charge) Act 2013 for that day by the sum of the following amounts:
- 1. the amount of tax on which the individual is liable to pay the charge (refer to Example 2 above for details on how to calculate this amount), and
- 2. the ECC charge on that amount from previous days.
When ECC charge is payable and consequences of non-payment
Generally, the ECC charge that an individual is liable to pay for an FY is due and payable on the day on which tax is due to be paid under their first NOA for that FY that includes an amount of tax on which they are liable to pay the charge (TAA s 95-20(1)). Technically, however, an ECC determination by the Commissioner is required to issue before an amount of ECC charge is due and payable (TAA s 95-20(2)).
Where the Commissioner amends an individual’s ECC determination, any extra charge resulting from the amendment is due and payable 21 days after the Commissioner gives them the notice of amended determination (TAA s 95-20(3)).
Further, if an amount of ECC charge or SIC (on ECC charge) remains unpaid after the time by which it is due to be paid, the individual will also be liable to pay the general interest charge (“GIC”) (TAA s 95-25).
We illustrate the interaction between ECC charge, SIC and GIC with an example:
Ray lodges his personal income tax return for FY 2018 on 17 September 2018 and receives an NOA with a payment date of 1 November 2018. On 9 November 2018, the ATO determines that Ray has ECC for FY 2018. The ATO provides Ray with an ECC determination and notice of amended assessment (“NOAA”) on 9 November 2018, with a payment date of 30 November 2018.
The ECC charge applicable for Ray applies from 1 July 2017 until the day before the day on which tax under his first NOA for that FY is due to be paid, ie 31 October 2018.
Ray must also pay SIC on the shortfall between the amount of tax that he originally paid and the amount of tax stated under his NOAA. We note that the amount of ECC charge payable as a result of the ECC increases the amount of the shortfall. The SIC is applicable from 1 November 2018 (ie the payment due date under his original NOA) to 29 November 2018 (ie the day before the payment due date stated on his NOAA).
Further, if the amount of ECC charge or SIC remains unpaid after 30 November 2018 (ie the payment due date stated on his NOAA), Ray will also be liable to pay GIC on any unpaid amount of income tax (which includes the ECC and ECC charge) and SIC.
For completeness, we note that the ECC charge is a tax-related liability and is not a penalty. However, and unfortunately, the ECC charge is not deductible for income tax purposes, unlike the SIC or GIC.
Refund of ECC
We briefly mention that an individual has a choice to either request for their ECC to be released from their superannuation fund(s) or to leave their ECC in their fund.
Broadly, an individual who receives an ECC determination for a FY may elect to release from their superannuation fund an amount of up to 85% of the ECC stated in the determination (TAA s 96-5(1)). An election is irrevocable and must comply with the requirements listed in s 96-5(3), (4) and (7) of the TAA.
Once the individual makes a valid election under s 96-5, the Commissioner must issue a release authority to the nominated superannuation fund(s). Naturally, the SMSF deed must also provide the power to release such amounts. Many SMSF deeds have not been updated in this regard. One advantage of electing to release an amount of the ECC is that this amount is then grossed up (eg multiplied by 100/85) and the grossed-up amount is no longer counted in the individual’s non-concessional contributions (“NCC”). To the extent that an individual leaves their ECC in their superannuation fund and that amount results in them exceeding their NCC cap for a FY, they will also be liable for excess NCC tax. Further consideration of the consequences of excess NCC is beyond the scope of this article.
The law in relation to ECC and ECC charge is complex and where in doubt, expert advice should be obtained. Naturally, for advisers, the Australian financial services licence under the Corporations Act 2001 and tax advice obligations under the Tax Agent Services Act 2009 need to be appropriately managed to ensure advice is appropriately and legally provided.