Tax surprise stings super savers

MORE than 65,000 people have been slugged by the ATO this year - so far - for contributing too much to their super funds.

MORE than 65,000 people have been slugged by the Australian Taxation Office this year for contributing too much to their superannuation funds.

The record number of breaches is more than double last year and has cost them $140 million in penalties and extra tax on their super savings.

The ATO says the final number of breaches this year could go higher, as all individual tax returns are still to be analysed and super fund audits have yet to be completed for the year to June 2010.

However, to date 65,000 excess contributions have been found, compared with a total of 28,000 in the previous year.

It is estimated that more than 100,000 people have been hit for extra tax and penalties since contribution caps came in almost four years ago.

People aged over 50 can only deposit a maximum of $50,000 in before-tax (concessional) contributions each year, while people under 50 can only deposit a maximum of $25,000.

Before-tax contributions may include employer super guarantee payments, salary-sacrifice amounts and any other contributions to a super fund claimed as a tax deduction.

The penalties for making excess contributions include being taxed at up to 93 per cent, plus fines for breaking the law.

Carol McKelson-Timmins, Health Super's chief operating officer, says many taxpayers will be shocked when they receive their tax assessments this year. In many cases the breaches would have been accidental, she says, and the assessment will come as a blow.

Australian Institute of Superannuation Trustees chief executive Fiona Reynolds believes the contribution caps should be more flexible to take into account people who have a one-off lump sum to pay into their super.

Reynolds says the rule, which allows people to "bring forward" up to three years of after-tax contributions, should extend to pre-tax contributions.

"It brings simplicity and makes the rules consistent across concessional and non-concessional contributions," Reynolds says.

"It would provide greater flexibility around the concessional contribution limits and mean that those who breach the caps could avoid penalty."

Taxpayers recently lost their ability to appeal to the Administrative Appeals Tribunal over penalties and extra tax charges that have been triggered by excess super contributions.

The Federal Court is now the only court in Australia to hear these appeals.

Contribution caps were introduced in 2007 to limit the amount of money people can save inside superannuation.

Before-tax contributions are taxed at 15 per cent when they are paid in to a super fund, as are investment earnings.

This compares with marginal tax rates of up to 45 per cent.