CONTRIBUTIONS TRAP!

High income employees may be in danger of being hit with penal tax rates of up to 93.5% if they inadvertently exceed the cap on concessional contributions under the superannuation reforms introduced last July.

A lot of concerns about extra tax had focused on the lack of tax file numbers, thought to affect mainly lower income fund members, but the threat of big tax slugs now appears to face high net worth people in superannuation.

Although the onus is on employees (or their financial advisers) to watch they don't exceed the limit (generally $50,000 a year or $100,000 for people over 50) there has not been a lot of publicity about the measure. It's just not well understood.

For instance, the cap includes insurance premiums paid by employers on behalf of employees; many high income employees would have several thousand dollars accounted for by insurance premiums paid that they might not connect with the cap on concessions.

The position is more complicated in the case of defined benefit fund members, where notional taxed contributions are calculated under formula from the Australian Taxation Office - which is still subject to a lot of queries actuaries.

The extra tax involved can make quite a dent in a member's contribution into superannuation and funds have a responsibility to ensure members full understand the implications of exceeding the cap and also have the best chance of avoiding extra tax.

People can exceed their cap for many reasons; they might be contributing to more than one super account (the cap applies to all accounts in a member's name), members might under estimate their employer's contributions or be unaware of the notional tax contributions in defined benefit funds.

It's also possible for large, one-off contributions to breach the cap and, if contributions are received late by a fund, they count towards the next year's cap.

Until now, many fund members might have thought that only their superannuation funds needed to grapple with Better Super (rapidly changed by the Howard government from Simpler Super when the complications became apparent).

Now, for a few, Better Super could become another tax nightmare.

Grant Hodgins - Director, Advantage One

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