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.

Excessive in Deed? Maybe not in this SMSF

What was previously excessive may not exceed at all - Withdrawal of ATO Taxpayer Alert, TA 2010/2

In late November 2011, the ATO updated their website with a release regarding the withdrawal of Taxpayer Alert 2010/2.  This document, titled “Fund rules intended to prevent excess contributions tax” outlines the ATO’s reasons for its withdrawal.  Interestingly, at the same time, as part of Government’s announcements in the Mid-Year Economic & Fiscal Outlook, it was released that to uphold the integrity of the contributions cap system, clarity with be provided on the operation of trust deed clauses.  How ironic!!

TA 2010/2 contended that a SMSF’s Trust Deed could not make provision that if a contribution was made to the Fund that was in excess of the contribution caps the Trustee could not accept the same and it would be returned to the contributing party regardless of its origin.

Primarily, it must be remembered that a SMSF is a Trust.  It is an inter vivos Trust that is administrated by the provisions of the Governing Rules – the Trust Deed.  I am not aware of any law relating to Trusts that prevents a Trust Deed providing that if a Contribution is paid to the Trustee and it is determined excessive to the caps that it is to be returned to the contributor.

It is interesting, the ATO, when making reference to the ability of the Governing Rules of the Fund (the Trust Deed) to have “… a clause … that is designed to treat amounts that would otherwise have been considered contributions to the fund … as not having been accepted by the fund if those contributions would lead to a breach of the contributions caps….” accepts that  “… In dealing with a payment received, trustees must act consistently with the super regulatory law and governing rules of the fund….”

The Articles also qualifies “…If a trustee of a super fund receives a payment described as a contribution, the trustee must promptly consider whether the payment is in fact a contribution...”

It is stated “…the fund will be deemed to have accepted such contributions, notwithstanding the trust deed clause, if the contributions have not been returned promptlyand have in effect been intermingled with assets of the fund…”

The ATO document also stipulates that “…In dealing with a payment received, trustees must act consistently with the super regulatory law and governing rules of the fund.

Obviously what is intended surely is that when a contribution is received by a Trustee it is dealt with in accordance with the provisions of the Income Tax Assessment Regulations 1997 – 292-90.01(2) – Trustee allocation of contributions within 28 days.

Additionally it seems possible, despite the ATO’s views in ATO ID 2007/225, that a SMSF “s Governing Rules could include a Clause to make it mandatory for the Fund to adhere to the provisions of Regulation 7.04(4)  the Superannuation Industry (Supervision) Regulations 1994 (“SIS Regs”).

SIS Reg 7.04(4) specifically states that if a contribution received is inconsistent with regulation 7.04(1), (in that it is above the non-concessional limit), sub-Reg (a) states the fund must return the amount to the entity or person that paid the amount. This must occur within 30 days of the Trustee becoming aware that the amount was received in a manner inconsistent with sub-Reg 1.

Strict statutory interpretation of the SIS Regs appears to qualify that every excessive non-concessional contribution should be returnable to its source.

A Clause in the Deed of a SMSF that supports the stipulation of SIS Reg 7.04(4) seems a palatable option to eradicate the dreaded excess contributions tax.

With the right SMSF Trust Deed maybe what was previously excessive will not be in excess at all.  We will wait with interest for the draft regulations relating to the operation of trust deed clauses, however the answer in my view will most likely be provided by the Courts one day when the appropriate challenge to an excess contributions tax assessment is invoked.

Written by:

Ian Glenister, Solicitor, Glenister & Co

Legal Officer and Co-founder of The SMSF Academy

Minister Shorten confirms review into Excess Contributions Tax

It was very pleasing to read today in the Australian Financial Review, that Assistant Treasurer and Minster for Financial Services & Superannuation, Bill Shorten has confirmed that Treasury is reviewing the current Excess Contributions Tax (ECT) penalty regime and is looking at options to change the laws.

The Minister was quoted as saying, “I am fully alive to it and hopefully will have an answer soon.”

With more than 188,000* people having already been potentially caught with excess contributions tax, and 65,000 excess contribution breaches in 2009/10, this issue appears to have become a political time bomb for a government already under-fire.   The collection of excess contribution tax revenue in respect to the 2009/10 tax year hasn’t even started, which we know is the big issue as a result of the government halving the concessional contributions cap!!

Listen to my recent webinar on Dealing with Excess Contributions Tax

I attended a breakfast last week where Minister Shorten shared his concerns on this issue.  His views appeared to support the fact that a 93% tax regime is grossly unfair and that action needed to be taken to remedy this issue.  The statistics raised by the Minister suggested less than 1,000 individuals have been subject to the 93% penalty tax, which only applies where both the concessional and non-concessional contribution caps have been breached.  I feel we will see positive action taken in respect to this matter in the Federal Budget next month (May).

I don’t have the same feeling though with changes occurring in respect to the existing ECT penalty tax regime for concessional contributions, where an additional 31.5% tax is applicable on top of the 15% contributions tax. Whilst Minister Shorten even acknowledged that he has been caught out with an ECT assessment, the fiscal reality is that the Federal Government has made a significant commitment to return the economy back into surplus by 2012/13.  As a result, I believe there is little scope for the government to currently consider making significant changes to the current revenue collections for ECT.

The ‘cynic’ in me says to expect more positive news on this issue and improvements to the contribution caps in the lead into the next Federal election, not the next Federal Budget.

It is important to remember that without an appropriate penalty regime to act as a deterrent, we may see individuals abusing superannuation retirement policy, knowing that there is little or no penalty by not complying with the law. However, there is surely a better balance between policing the contribution caps and encouraging people to save for retirement.  Hopefully, this is the start of finding the right balance!!

Click here to download my webinar of Dealing with Excess Contributions Tax

* Thomsons Reuters, 9 March 2011, Excess superannuation contributions tax – how much is collected?

(C) The SMSF Academy 2012
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