The trap for high income earners
While all attention is focused on the introduction of the $1.6 million pension and non-concessional contribution cap, the reduction in the annual concessional cap to $25,000 will create significant problems for many taxpayers and the Tax Office.
There currently is no problem for either the Tax Office or taxpayers where employers are providing employees only with superannuation under the Superannuation Guarantee Legislation.
This legislation caps the maximum required employer contribution of 9.5 per cent of salary on an annual salary of $211,040 in 2017-18. This maximum required superannuation contribution of $20,049 is below the new $25,000 contributions cap and is likely to remain so for several years.
Major problems will arise, however, unless major employers, including the federal government, defence force and the universities, restructure their employer super arrangements. If current arrangements continue, the Tax Office will be required to issue and collect a greatly increased number of penalty tax assessments for breaches of the $25,000 annual cap.
The basic problem for higher income taxpayers is current legislation gives employers all the control over whether their annual contributions exceed this cap. If the employer continues to provide annual superannuation benefits higher than the cap, the Tax Office is required to levy and collect penalty tax on the excess at the taxpayer's marginal tax rate.
Providing a major benefit not available to accumulation fund members, the legislation exempts almost all defined benefit fund members from the penalty tax levied on employer contributions above the $25,000 cap. Those now facing penalty tax bills include higher income accumulation fund federal employees recruited after June 2005 receiving employer contributions of 15.4 per cent of salary. For recent defence force employees, the figure is 16.4 per cent of salary while universities pay employer super of up to 17 per cent of salary. The Tax Office will thus be levying penalty tax on annual salaries ranging from between $147,000 and $162,000 depending on employer.
With salaries in these organisations up to several multiples of these annual amounts, the Tax Office will be required to assess and collect many penalty tax bills. Prior to 2007 when the Reasonable Benefit Limits were abolished, the super legislation allowed taxpayers with total benefits exceeding the limit to instruct their employers to cease super contributions.
This created a problem if employers were not prepared to increase other remuneration to compensate for the lower super. The government could simplify life for both taxpayers and the Tax Office by enacting legislation requiring employers when requested by employees to limit their annual super contributions to the $25,000 cap and pay the balance as wages.
This would help the Tax Office and the employees whose employers have inflexible super arrangements.