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Subject: Concessional contributions cap
Question
Will superannuation contributions in excess of the concessional contributions cap made under a salary sacrifice arrangement to a constitutionally protected fund be counted towards your client's concessional contributions cap in the relevant income year?
Advice/Answer
No.
This ruling applies for the following period
Year ending 30 June 2013
The scheme commenced on
1 July 2012
Relevant facts and circumstances
Your client is a member of a superannuation fund (the Fund). The Fund is a constitutionally protected fund (CPF) administered by a superannuation board. The Fund is also an exempt public sector superannuation scheme and a complying superannuation fund.
Your client is an employee. Superannuation contributions are to be made to the Fund by your client's employer under a salary sacrifice arrangement (SSA) which will commence in the relevant income year.
Under the SSA with your client's employer, superannuation contributions will be made to your client's membership account with the Fund. These contributions will exceed the concessional contributions cap of $25,000 for the relevant financial year.
Your client is under the age of 65 years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 292-20(2).
Income Tax Assessment Act 1997 Section 292-25.
Income Tax Assessment Act 1997 Subsection 292-25(2).
Income Tax Assessment Act 1997 Paragraph 292-25(2)(c).
Income Tax Assessment Act 1997 Subparagraph 292-25(2)(c)(iii).
Income Tax Assessment Act 1997 Subsection 292-25(3).
Income Tax Assessment Act 1997 Subsection 307-350(1).
Income Tax Assessment Act 1997 Subsection 995-1(1).
Income Tax Assessment Regulations 1997 Regulation 295-25.01.
Income Tax Assessment Regulations 1997 Regulation 995-1.04.
Income Tax Assessment Regulations 1997 Subregulation 295-25.01(3).
Reasons for decision
Summary
The Fund is a CPF. The contributions made to the Fund under the SSA are not included in your client's concessional contributions. As a result, these contributions are not counted towards your client's concessional contributions cap.
However, when your client receives or rolls-over the benefit from the CPF, the element untaxed in the Fund will be assessed against the untaxed plan cap amount at that time. Any amount in excess of the untaxed plan cap amount will be subject to tax at your client's highest marginal rate.
Detailed Reasoning
Concessional contributions
Concessional contributions made to superannuation funds are subject to an annual cap. For the relevant income year the annual concessional contributions cap is $25,000 (subsection 292-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997)). The concessional contributions cap is subject to indexation.
Concessional contributions in excess of the concessional contributions cap are called excess concessional contributions. A person is taxed on the excess concessional contributions at the rate of 31.5%. In addition, the amount of any excess concessional contributions for a financial year is counted towards the person's non-concessional contributions cap for that year.
The amount of a person's concessional contributions for a financial year is determined under section 292-25 of the ITAA 1997. Subsection 292-25(2) provides that unless specifically excluded, they include contributions made to a complying superannuation fund by or for a person in that year, which are included in the fund's assessable income. Most commonly, these will be employer contributions (including contributions made under an SSA) and personal contributions claimed as a tax deduction by an individual.
Amounts which are not concessional contributions
Most contributions that are not assessable income of the fund are not concessional contributions. Paragraph 292-25(2)(c) of the ITAA 1997 sets out amounts that are not included in a person's concessional contributions for a financial year, even though these contributions might otherwise be included in the fund's assessable income for that year.
Subparagraph 292-25(2)(c)(iii) of the ITAA 1997 specifically excludes any contributions made to a CPF. This is because a CPF does not pay income tax on the contributions and earnings that it receives. The exclusion under this provision also applies to contributions that are made to a CPF under the SSA.
Constitutionally protected fund
Subsection 995-1(1) of the ITAA 1997 defines a CPF as meaning:
… a fund that is declared by the regulations to be a constitutionally protected fund.
Regulation 995-1.04 of the Income Tax Assessment Regulations 1997 (ITAR 1997) states that for the definition of CPF in subsection 995-1(1) of the ITAA 1997, a fund established by a specified provision of a State Act mentioned in Schedule 4 of the ITAR 1997, is a CPF.
In this case your client is a member of the Fund which is established under an Act mentioned in Schedule 4 of the ITAR 1997. As such, the Fund is a CPF. Hence, the exclusion under subparagraph 292-25(2)(c)(iii) of the ITAA 1997 applies to the contributions your client's employer makes to the Fund under the SSA.
Subsection 292-25(3) of the ITAA 1997 provides that the amount of a person's concessional contributions also includes additional amounts allocated to the person by the superannuation provider. For example, additional amounts allocated to a person from a reserve can be counted towards a person's concessional contributions cap. The conditions and rules determining these amounts are specified in regulation 295-25.01 of the ITAR 1997.
Paragraph (c) of subregulation 295-25.01(3) of the ITAR 1997 states that a contribution made to a CPF is treated as an amount that has not been allocated by the superannuation provider in a way that is covered by subsection 292-25(3) of the ITAA 1997.
As the Fund is a CPF, contributions made to the Fund are not treated as concessional contributions under subsection 292-25(3) of the ITAA 1997. Therefore, they are also not counted towards your client's concessional contributions cap under this provision.
Accordingly, the contributions made to the Fund under the SSA are not concessional contributions and are not counted towards your client's concessional contributions cap for the relevant income year.
Untaxed plan cap amount
The untaxed plan cap amount limits the concessional tax treatment of benefits that have not been subject to tax in a superannuation fund. Amounts received in excess of the untaxed plan cap amount are subject to tax at the highest marginal rate.
The taxable component of payments made from a CPF, are an element untaxed in the fund because, as a CPF, it is specifically exempted from tax on all contributions and earnings it receives.
In accordance with subsection 307-350(1) of the ITAA 1997, the untaxed plan cap amount applies to each superannuation plan from which a person receives or rolls-over a superannuation lump sum member benefit, that includes an element untaxed in the fund.
For the relevant income year the untaxed plan cap amount is $1,255,000. The untaxed plan cap amount is indexed annually.
Concessional contributions to a fund other than a CPF are counted towards the concessional contributions cap
Under subsection 292-25(2) of the ITAA 1997 concessional contributions include employer contributions and contributions made under a SSA. Where concessional contributions are made to a complying superannuation fund other than a CPF, the contributions are counted towards your client's concessional contributions cap.
Therefore if your client makes concessional contributions to another fund other than the CPF, they will be counted towards your client's concessional contributions cap.