Exceeding 25K. Pay tax or withdraw?

Hi all, interested in what people do if they exceed the 25K contrib. to super.
Last year I got a bill saying I had to pay tax on the excess (at my marginal rate-15%),
or take the money out of super. I think it unikely that I will hit 1.6M - but might get to 1.4M.

My head tells me that I should pay the tax as once inside super the returns the excess makes will be tax free, and will help me build towards 1.6M and a greater tax free income when I retire.

My heart tells me that I should take the excess money out and stick it the offset account (on home equity loans against shares) that will eventually be moved to an offset account against a lifestyle beach property that we rent out. I think it will take us 7 years to make the offset match the property loan (i.e., we will effectively own it). It will take longer if we pay tax on our excess contributions.

I reason that this will become part of my "outside super" assets than can earn up to $18,200 per year if I do rent out the property. Thus even I am below 1.6M I still have 0% tax. If I do end up with super+18200 outside tax free+ extra income that I pay 19 cents on then that is not the end of the world.

Is my take on this basically right? What would others do?

 

could you make a non-deductible contribution? seek financial advice.

 

I could potentially make a non-concessional contribution down the track when I have more money and effectively own the beach house.

I take it this would have the advantage of reducing my outside-super assets and putting them in the super tax shelter. I like that idea as I get flexibility later if I end up with too much outside super. Nice. Thanks!

 

There is never too much.

 

If you personally pay the excess and leave the $$$ in super you are paying using after tax money. It acts akin to a non-concessional contribution by retaining the super verses with release option. As Terry says that is the other option (so its same effect two different ways).

The general rule is to to avoid incurring excess contribution issues in the first place. The tax rate is your marginal tax rate (the 15% was paid by the fund). Leaving excess funds in a offset may reduce your deductions but at the interest rate (eg you elect not to contribute 2k...The interest saving is 5% of that) and the tax cost is also at your marginal tax rate. eg $2K x 5% x.47% A far lesser financial impact than paying excess contributions tax.

The super release to watch is Div 293 which is the extra 15% oh high income earners. It also offers a super fund release method. The catch is if you dont act to do that within 60days and have to pay it personally (or elect to) then the payment of the Div 293 is also added as a concessional contribution and this counts to the cap too.

 

Is the beach house in super or a separate asset?

 

Yup, I missed that bit.

 

Yes. I am in an industry fund, and have the house and other ETFs outside super.

 

Super. what a complicated system. does it need to be? my wish list is - just make a KISS - keep it simple stooopid

 

Actually super is simple. The tax laws that apply now are no different to 1930s. It all the little changes inbetween and layers of rules.Why? To help keep it as one of the best tax schemes in the world.

 

Best in the world?
Depends on your perspective.

From a national savings perspective - yes, it's fantastic.

But our super system is soooo complicated, with toooooo many exceptions, variations, sliding scales and rules.
It is highly regulated, and Australian bureaucracies are good at regulation.
This is red tape on steroids.
And the rules keep changing, fine tuning they reckon, but the cost is time to learn new info, which in most cases is irrelevant.

But worse, these regulations, are scripted in endless pages of writing - which favour the rich, the literate and the educated - and the cheerleaders that earn their coin from that demographic. Meanwhile, our super system discriminates against the lessor educated, English as 2nd language and those with limited financial education demographic, this group includes plenty of builders earning big coin.

In we are going to create discriminatory systems, then let's do it properly.
15% flat tax on the way in.
put as much in as you want (delete the $25K limit)
delete 90% of the other rules.

 

Put as much in as you can.....So only wealthy benefit and get a bigger benefit. That is the rules they used to make it more complicated. To limit this. They say its fairer.
I wouldnt want my own savings taxed at 15%. No incentive to save if I pay tax twice on my money.
Tax deductions or not for member contributions ? Hang on that benefits the wealthy too. Jake earns $300K and contributes $280K to super now he pays no tax. And just banked his savings paying just 15%. Seems unfair to allow Jake to avoid that much tax. Every single year. Yet Mary the factory worker pays 40% and cant save a cent extra in super.

And what about stopping people "blowing" their large super balances ? Rules to limit wasting it ? Gifting it ?
What happens when they die ? Oh their beneficicaries pump it back into their own super....Tax isnt paid....here we go again. Who is paying tax ?

So you are proposing no age pensions as everyone has abundant super? Thats where it fails. A two tier class structure. Thats why its limited. Its the best tax avoidance scheme in the world so it should be limited. People scream - Its a massive tax benefit any others just shrug and say - Its too confusing. So is apply for an age pension. I never want an age pension.

So we come back to why its complex. Once upon a time PJ Keating proposed tax was paid on the way out not on the way in. That was also too complex and the Govt realised tax wasnt being paid for a long long time so they made it easier and complicated the rules. And havent stopped since. One of the biggest drivers for changed super laws are trade unions. They run the super racket. Created by unionists (ALP) and they run all the industry funds. They want more super too.

Agree on the two group issue. Compulsory super doesnt also benefit 100%...Its around 75%.

And the easier you make rules the more who look to abuse and exploit. Caps on super are the biggest roadblock to wholesale tax abuse.