Common Super strategy warning, maximising contributions

I guess this probably is an example of where expert superannuation advice should be taken before undertaking a common super strategy to maximize the amount you can contribute in super. Any super expert out there - were you aware of this?

What is commonly spoken about:

If you have a large lump sum, say $450,000 you wish to contribute to super and you satisfy all the rules to be able to make contributions, age, super balance etc.
The common strategy is in year 1, some time before 30th June, make a non concessionary (i.e. after tax) contribution of $100,000 and a $25,000 concessionary contribution (obviously less any other concessionary contributions already made, employer etc.).
In year 2, anytime from July 1 onwards, make another non concessionary contribution of $300,000 (utilizing the bring forward rule) and at the end of the year make another $25,000 contribution (again less any other concessionary contributions already made).

All seems fine until you find out that the ATO will automatically limit any concessional contribution you make to a maximum of your taxable income.
ATO will deem any contributions above your taxable income as non concessionary contributions.
So from there point of view, if your taxable income was $24,000 in year 1 then your concessionary contribution was $24,000 and your non concessionary contribution is $101,000. This triggers the bring forward rule which limits year 2’s concessionary contribution to $199,000.
Of course if you followed this strategy you only find out the above after you have made the contributions. Hence you have significantly exceeded the allowed non concessionary contributions in year 2.
You will be forced to make amends (e.g. withdraw additional contributions, pay extra tax on any earning etc etc.).

As you can guess, this is the position I find myself in (some different numbers though). All about to be sorted out with the only real outcome being I will end up with a large lump sum I will need to invest outside super until I can next contribute it back). My accountant is saying potentially I might actually end up a few dollars better off as the 15% charged by my super fund for the $25,000 will need to be reduced to that actually deemed concessionary.

The most annoying thing about this is that I can find nothing in tax law (and I’d be happy for someone to show me if it does) that states a concessionary contribution has to be tax deductible, i.e. less than or equal to taxable income. The tax act (1997) clearly defines what a concessionary contribution is and limiting it to taxable income is not part of it.

Given the likely potential upside (or very limited downside) for me I’ve given up arguing the point and am withdrawing my ATO objection.

And yes I know that paying a $25,000 concessional contribution with only a $24,000 taxable income is not tax efficient. That is you pay 15% tax on the contribution in super where your personal tax rate would be somewhat lower than that. However you may have only found out your taxable income is below $25,000 after you have already made the contribution or you may not care about the tax as your strategy of maximizing super is more important to you than a small amount of extra tax.

 

Whaaaa. I need a kindle to read that

 

Would you be able to amend Year 1's tax return and change the concessional contribution amount (if it has a tax deductible personal contribution part in it) to less than $25k?

 

The $25k was 100% a personal contribution.
Reducing the concessional $25k would increase the non concessional which is what ATO is doing in effect so not sure what this would achieve.
The super fund received $125,000 in year 1 that has to show up somewhere.

 

If the $25K concessional was incorrect then it can be unwound and made a $125K non-concessional amount. This assumes the taxpayer has no "catch up" cap available. Many taxpayers with under $500K balances who didnt contribute up to their cap in 2019 will have a concessional cap of more than $25K. Receiving more than $100K means the 3 year bring forward non-concessional rule is triggered by exceeding the $100K cap in the first year. Take care in the next two years so that the $300K is not exceeded. ie $100K in year two and $75k max year three

A concessional contribution by its very definition in tax law is that a tax deduction has been or will be claimed. If none is eligible it may also mean a concessional contribution will be reclassified as non-concessional by the ATO. Overpaid tax could occur in the fund. This can occur two ways.
1. Breach of cap so ATO counts a concessional and non-concessional. They may even impose Excess contributions tax etc initially. And the catch up cap isnt available ?
2. Taxpayer cant claim a deduction eg taxable income is too low. A super deduction cannot create a tax loss. The ATO will cancel the deduction excess and change the contribution classification

The $125K will be subject to what the fund reports and then what the ATO could correct if its a issue.