Caution urged on excess contributions handling

Law firm Hall and Wilcox Lawyers has claimed an element of vindication in the wake of the decision by the Australian Taxation Office (ATO) to withdraw its tax alert questioning the ability of trustees to return excess contributions.

The law firm said it had disagreed with the Taxpayer Alert originally issued by the Tax Commissioner on 31 March this year.

A Hall and Wilcox update issued this week said the Tax Commissioner had withdrawn his 31 March alert and "concluded that some trust deed clauses may prevent a payment to the trustee from forming part of the fund and therefore, from being a contribution for excess contributions tax purposes". 

However, the update also noted that as part of its Mid Year Economic and Fiscal Outlook for the 2012 income year, the ATO will maintain the integrity of the contribution caps by ensuring that trust deed clauses cannot be used to avoid excess contributions from being counted against the caps.

Hall and Wilcox said that in light of the withdrawal of the Taxpayer Alert and the proposed amendments to the law that deemed contributions to have been made to a fund in certain circumstances, it was important to ensure a clause preventing a trustee from accepting a certain payment was effective in light of the trust deed as a whole.

"On the basis that the particular clause is effective, the entity making the payment is not entitled to a deduction available for superannuation contributions," it said.

"The payments should be held on a separate trust, which means that the earnings will be taxed in the hands of the beneficiary for income tax purposes.

"Importantly, the Commissioner takes the view that if the trustee does not identify payments that do not form part of the trust and combines these payments with the trust fund, the trustee may breach its duties under the terms of the trust deed," the Hall and Wilcox analysis said.

The law firm suggested that trustees should take the following steps as an interim measure to ensure that certain payments to their fund can be returned to the contributor without breaching either tax or trust law:

• ensure that the trustee has power in the trust deed to return an amount paid to the fund in excess of the contribution caps or by mistake;
•  identify and hold any contributions to the fund on a separate trust until the trustee has determined whether the trustee can accept the contribution;
• for payments that the trustee cannot accept under the terms of the trust deed or regulation 7.04 of the Superannuation Industry (Supervision) Act 1994 (ie, fund-capped contributions), the trustee should return the payment as soon as possible to the person making the payment; and 
• the payer should ensure that the amount is treated as though it was never contributed to the fund, such that the payer should not claim a deduction for the contribution. 

From a practical perspective, any amount held on a separate trust should be taxed in accordance with the taxation provisions applying to a fixed trust rather than a superannuation fund.