INFOGRAPHIC: Latest ATO Excess Contributions Tax statistics

The ATO has recently updated its website with the latest statistics regarding excess contributions tax (ECT), which continues to show individuals predominantly getting caught with their concessional contribution (i.e. salary sacrifice arrangements).  After a 314% increase in ECT notices in 2009-10, there has been a reduction again in 2010-11 to date, however it is significantly higher against historical statistics.   After collecting a whopping $176.6 million in ECT revenue in 2009-10, statistics for 2010-11 already show a further $100 million of revenue collected so far.

The newly introduced “one-off” refund of concessional contributions will appear to get a heavy workout in its first year of operation (2011-12) based on current statistics!

I have created an interactive infographic that details that latest ECT statistics (click on image below to view):

View the Infographic

You can access the latest ATO excess contribution tax statistical report here.



Back-to-back wins for taxpayers with excess contributions tax cases

Deciding to take on the Commissioner with Excess Contribution Tax (ECT) assessments was becoming a daunting task, with a perfect record that started to look a little like Black Caviar’s!!  Well, the last couple of cases has seen the taxpayer land knockout blows against the Commissioner at the Administrative Appeals Tribunal (AAT).

After tasting defeat for the first time on in Bornstein’s case regarding the exercising of discretion due to “special circumstances”, a similar outcome has occurred in the AAT case of Longcake vs. Commissioner of Taxation.

In this case, the taxpayer incurred an ECT liability of $6,788 for the 2009-10 financial year based upon reported concessional contributions of $71,551.  The taxpayer argued (successfully) that $25,367 of these contributions related to the 2008-09 financial year.

Many of the cases to date that have been found in favour of the Commissioner state that special circumstances do not exist “simply because of the taxpayer’s misfortune, but rather the uniqueness of events which give rise to the misfortune” (see Tran and Commissioner of Taxation [2012] AATA 123).

In this case, the additional ‘special circumstances’ included:

  • Longcake had sought to arrange his affairs to not breach the concessional contributions (CC) cap;
  • the contributions to AMP were not to continue beyond 30 June 2009 as he had made a deliberate decision to cease that fund;
  • no further prospective salary sacrifice arrangement was made with his employer to contribute to the AMP fund for the 2009-10 financial year
  • he relied on the terms of the agreement with his employer for contributions to be made in a timely manner
  • there was irregularity in super contribution payments by his employer

The Tribunal found that these circumstances that were present set apart this case from more usual or ordinary cases.

It was interesting to note the acknowledgement by the Tribunal of the general ‘confusion’ of the timing differences between employer obligations for SGC purposes and when super funds report the contributions as being received.  The court stated that:

“… there may well be genuine confusion in the minds of employers, in particular those operating a small business, about exactly when concessional contributions arising from salary sacrifice are to be made to the employee’s superannuation funds”.  Although, this in itself though, does not constitute special circumstances.

Like Bornstein’s case, this win does open up some scope for taxpayers to consider challenging ECT assessments (s.292-245 of ITAA 1997) on the grounds of special circumstances.  It is important however to work through the particulars of case such as these to see the characteristics that set this case apart for the taxpayer victory.

With the spike in ECT assessments again expected for the 2012-13 financial year, the timing of contributions remains as critical as ever!

Changing landscape when dealing with excess contributions?

Much has been talked about of the budget announcements impacting contributions, in particular a flat $25,000 concessional contribution cap that will apply across all individuals from 1 July 2012.  Whilst concessional contributions have been impacted, non-concessional contribution amounts will remain at $150,000 p.a. with the bring forward rule available for those under age 65.

Given the statistics that resulted from the last halving of the concessional contribution cap (see post, latest statistics on excess contributions tax), I would envisage further excess contributions tax issues resulting from many individuals 50 and over again requiring to change salary sacrifice arrangements down from $50,000 to $25,000.

The ‘get out of jail free’ card was always handy when playing Monopoly, and importantly we now have something like this available (in several forms) when it comes to dealing with excessive contributions.  These remedies outlined below may assist with any concessional contribution or non-concessional contribution cap breach:

  • Once off-refund of excess concessional contributions – Timing is everything when it comes to making contributions, in particular where employer obligations for SGC (and salary sacrifice) don’t mirror when a contribution is received and reported by a SMSF for contribution cap purposes.  Whilst many people got caught previously in the 2010 FY due to this timing issue, this time around any excessive amount of $10,000 or less can be disregarded by the Commissioner and be re-assessed within the individual’s tax return for the financial year.  Subject to their own marginal tax rate, this may provide a better outcome.  Read previous post on proposed changes to refund excess contributions (to be effective from 1 July 2011).
  • Contributions reserving – Another ‘get out of jail’ strategy was to effectively park any June contributions into a holding account or reserve within the SMSF, subject to the fund’s trust deed not prohibiting the use of reserves.  We have recently seen clarity provided by the ATO in the use of this strategy through ATOID 2012/16, which states that whilst the contribution for income tax purposes is assessable in the year paid into the fund, for contribution cap purposes, it counts in the year in which it is allocated.  See previous post for further details.  The use of a contributions reserving strategy can apply equally to non-concessional contributions.
  • De-minimus test – this change in view in March 2012 from the Australian Taxation Office certainly hasn’t made any headlines, but provided a significant shift in thinking by the Commissioner in collecting large ECT amounts triggered by small amounts.  The ATO are currently working through a series of these assessments previously raised to effectively refund an individual as a result of a disproportionate ECT liability due to a small breach of the concessional and non-concessional cap.  To date, we have no guidance on what constitutes a small amount to be disregarded.  More information on this can be found in my previous post, de minimus to help with contribution maximis
  • Returning Amounts – SIS Regulation 7.04(3) outlines that a fund can not accept a fund-capped contribution; that it a contribution which is greater than three times the non-concessional limit for someone under 65 years of age, or more than the non-concessional limit where someone is 65 years of age older.  Where a single contribution is made into an SMSF that is excessive, the trustees are obliged to return the excessive amount.  ATO ID 2009/29 outlines that there is effectively no timeframe to return the excessive contribution as it should not have been accepted by the super fund in the first place.  As a result, if an individual makes a single excessive contribution they have the ability to retain this amount without being subject to excess contributions tax.

Ongoing management of contribution caps is still the most important role you play to ensure that an individual does not breach their contributions caps.  Whilst still far from perfect, at least the law provides some opportunities to use the ‘get out of jail free’ card to address any potential excess contributions tax issues.

Get your June salary sacrifice amounts in order now to avoid excess contributions tax

The recent release of the 2010 ATO excess contribution tax statistics for concessional contributions showed a 296% increase to date in the number of people caught up in this ongoing saga.  The key issue that triggered this enormous spike was the Labor Government’s decision to halve the concessional contribution caps from:

  • Under 50 – $50,000 down to $25,000; and
  • 50 and over – $100,000 down to $50,000

Many of these people got caught in the timing of their existing salary sacrifice arrangements, where it is not commonly understood that employers and super funds having different reporting obligations.  This event is likely to occur again in 2012/13, where the concessional contribution cap is to reduce to $25,000 for those 50 years of age and above.  The only exception to this may be the proposed extension to the concessional contribution cap for those people 50 and above who have an account balance of less than $500,000.

To understand this issue, let’s take a look at the following example:

John (over 50) is salary sacrificing to his $50,000 concessional contribution cap limit for 2011/12.  His June 2011 payment of $4,166 has to be paid by his employer prior to 28 July, which meets their SGC obligations as an employer.  John’s SMSF when it receives the payment in July, will report the amount for the 20012/13 financial year (not 2011/12).   Unless John is eligible for the extension to the concessional contribution caps for those over 50 with an account balance of less than $500,000, his concessional contribution cap next year will reduce to $25,000.

The super fund will report the following contributions for John in 2012/13:

  • $4,166.67 in July 2012 +
  • 11 x $2083.33 for August to June 2013 inclusive

This totals $27,083.33 meaning John has $2083.33 of excess contributions subject to tax at 46.5% (15% contributions + 31.5% penalty tax).

But what about the ability to now refund concessional contributions?

Whilst the Government provides (since 1/7/2011) a ‘once-off’ refund for individuals who breach their concessional contributions by less than $10,000, to rely on this refund mechanism in my view is playing a dangerous game.  Whilst an amount may be able to be disregarded by the Commissioner and re-assessed in John’s personal tax return, what if John had previously breached the cap in the 2011/12 financial year?

Many members and advisers would be best served to start reviewing salary sacrifice arrangements now to avoid the anguish.

Latest ATO statistics on excess contributions

The Australian Taxation Office last Friday provided an update to the Excess Contributions Tax (ECT) statistics.  Many in the industry have been waiting to see the impact of the Labor Government’s decision to halve the concessional contributions cap for the 2009-10 financial year.  As you can see from the chart below, it was significant, with 45,330 ECT notices issued for breaches of the concessional contribution cap.  This represented a 296% increase over the previous financial year, collecting $130.9 million in taxes.

Whilst it is encouraging that both the Federal Government and ATO have now responded to these issues of excess contribution tax (see ‘once-off refund’ and ‘de-miminis test’), it is quite clear that ‘horse had bolted’ by this stage, given the amount of assessments issued in for 2009-10 financial year… and aren’t finished yet for that financial year!!

Interestingly when looking at the following chart, we have progressively seen a reduction in the level of excess concessional and non-concessional contributions (however, not where caught with both CC & NCC).  The average excessive concessional contribution for 2009-10 is $2,888, well inside the proposed ‘once-off’ ECT refund limit of $10,000.  Non-concessional contributions have dropped extensively as well.

It appears only now are people who contribute to superannuation understanding the importance of appropriately planning and managing their contribution limits.  This problem has not only impacted members, but also professional service providers (e.g. advisers, accountants, etc.) who may have been implicated in any cap breach.

People impacted by inadvertent breaches where small amounts have triggered large excess contributions tax liabilities are currently being refunded these tax amounts by the ATO.  For the rest of us (including Minister, Bill Shorten), breaching your excess contributions tax limit can become a costly exercise that requires greater attention.

(C) The SMSF Academy 2012
%d bloggers like this: