Changes made late last year to the draft legislation tabled in parliament governing the refund of excess non-concessional contributions (NCC) have provided further clarity on how the rules will operate and a positive result for SMSF trustees already drawing a pension.
The excess NCC determination will now consist of three elements – the excess NCC amount, the sum of earnings associated with the excess contributions, and the total release amount defined as the aggregate of the excess NCC and 85 per cent of the associated earnings.
Under the proposed legislation, if the SMSF member decides to release the total release amount, the excess NCC will not be taxed, but the entire associated earnings will have to be included in the member’s assessable income for tax purposes.
The member will, however, be eligible for a 15 per cent non-refundable tax offset relating to the associated earnings in recognition these earnings may have already been taxed in the SMSF.
In looking at the rules, sector specialist Heffron SMSF Solutions stressed the released amount would be treated as a superannuation benefit payment.
“This means it will count towards the minimum and maximum pension and will draw down on any unpreserved amounts first. However, it will not be taxed as a benefit and will be specifically excluded from those rules,” Heffron said.
“This means, for example, for taxpayers under 60 it will not give rise to additional taxes even if it does include a taxable component and it will not use up any of the low-rate threshold.”
An additional amendment gives members drawing an income from multiple pensions, where the amount in the release authority issued to the fund is less than the aggregate of the existing pensions, the ability to elect which pension the amount to be released will come from.
The prior version of the draft legislation dictated individuals in this situation had to fully exhaust any tax-free components available when formulating the released amount.
Again, in its analysis of the current form of the proposed legislation, Heffron regarded that amendment as a significant windfall for SMSF members.
“Clients would almost always be well advised to draw their refund from the interest with the highest taxable component,” it said.
“One caveat, though, the refund will be treated as a benefit payment and it will therefore draw down on the unrestricted non-preserved component first.
“This new ability to specifically choose the interest from which the refund will come will also allow clients to be somewhat selective about leaving their unpreserved balances intact by deliberately choosing to withdraw the refund from a balance that does not contain the unrestricted non-preserved amount.”