The recent removal of the punitive tax rates on excess non-concessional contributions (NCC) was not a free pass for SMSF advisers to neglect the caps, according to an expert SMSF lawyer.
While the move was positive, there were still possible traps in the legislation to watch out for, DBA Lawyers director Bryce Figot said.
“For example, I put in $150,000 of NCCs into my super last financial year and then I used the bring-forward rule this year and put in $540,000, however, I didn’t realise that last year there was a $1000 NCC thus triggering my three-year bring-forward cap last financial year,” Figot told selfmanagedsuper.
“This means I had a $450,000 cap last year, so when I put in $540,000 I’m exceeding my cap by $241,000 and in the past that was disastrous because it would give rise to a lot of tax.
“Now, with this new legislation it’s not as disastrous, but it means you have to essentially withdraw that $241,000 and [theoretically] that all sounds fine, however, the trap is that a $540,000 contribution profile is someone who is just about to turn 65.”
Therefore, that person entering retirement would have to wait until their three-year rule was refreshed, he said.
“It’s not this financial year, it’s 1 July 2016 and if you presume they’re no longer working, then they’ve missed the boat,” he said.
“It’s not a fait accompli – advisers still need to keep their guard up.”
Commenting on whether the removal of the severe tax rate on NCCs meant the government was moving toward a fairer tax system, he said the new regime was still very difficult to explain.
“We are getting closer to a fairer tax system, however, we’re certainly not getting closer to a simpler tax system because I think part of being a fair system is being an understandable system,” he said.
“So overall it’s better, but by no means are we living in a legislative utopia.”
The change was announced by the government on 4 March and allowed fund members to withdraw NCCs that exceeded the cap.
Under the former regime, taxpayers could face up to 94 per cent tax on excess NCCs.
SMSF Association chief executive Andrea Slattery commended the Senate vote to end the “draconian” system as it severely punished trustees for inadvertent contribution mistakes.