To the extent you make a Non Concessional Contribution exceeding your Non Concessional Contribution Limit the ATO will contact you after the lodgement of your SMSF Annual Return. You will be asked to choose how your Excess Non Concessional Contributions are taxed. You have the following options:
Option 1 Release the excess amounts from your SMSF
If you choose this option, you are electing to withdraw all your Excess Non Concessional Contributions and 85% of associated earnings from your SMSF. In this case, the Excess Non Concessional Contributions will NOT be subject to Excess Non Concessional Contributions tax. However the full associated earnings amount stated in your determination is added to your assessable income and taxed at you marginal tax rates subject to a 15% tax offset.
The ATO will send a release authority form to the superfunds you nominated. From 1 July 2018, you will have 10 working days to action a release authority.
Option 2 Pay Excess Non Concessional Contributions tax on the excess amount
If you choose not to release your Excess Non Concessional Contributions from your SMSF, the Excess Contributions over the Non Concessional Contribution Limit will be subject to Excess Contributions Tax at the highest marginal tax rate of 47%.
Excess Contributions Tax can result in double taxation, with an effective tax rate of up to 94%! To avoid this disastrous situation, it is vital that you keep track of all your Non Concessional Contributions.