To the extent you make a Non Concessional Contribution exceeding your Non Concessional Contribution Limit your SMSF must return the excess contribution to the contributing Member within 30 days of receiving the contribution.
To the extent that this does not occur, the ATO will ask you to choose how your Excess Non Concessional Contributions are taxed after the lodgement of your SMSF Annual Return. You have the following options:
Option 1 Release amounts from 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 amount of associated earnings is added to your assessable income and taxed at you marginal tax rates subject to a 15% tax offset.
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 49%.
Excess Contributions Tax can result in double taxation, with an effective tax rate of up to 98%! To avoid this disastrous situation, it is vital that you keep track of all your Non Concessional Contributions.