Staying on top of end-of-year super issues

It is important that advisers and clients carefully monitor the ongoing contribution cash flow into superannuation funds. It’s particularly important just before the end of financial year.

Restriction of acceptance only applies on a per-fund membership level, and by single payment. That is, each fund does not need to consider what contributions were made to another fund, or contributions made earlier in the tax year. A misunderstanding on the difference between superannuation and taxation legislation can result in significant taxation consequences for superannuation members.

Implications for employed persons

The penalty for exceeding the specified yearly taxable contribution levels for couples and singles moved from the employer to the emplo-yee. Prior to July 1, 2007, exceeding the age-based limits excluded employers from claiming the excess contribution as a deduction. Now the employer can claim a full tax deduction for all employee contributions, but the employee will suffer an additional 31.5 per cent penalty tax on the excess above the concessional caps.

In fact, excess concessional contributions could also be taxed at up to 93 per cent if the person also breaches their non-concessional contribution cap after the excess concessional contributions are added to their ‘real’ non-concessional contributions.

Implications for self-employed

A person can make a personal concessional contribution within the relevant concessional contribution cap if:

• a valid section 290-170 notice is not received — the personal contribution is considered a non-concessional contribution;
• the deduction is denied or reduced by the Australian Taxation Office (ATO) — the balance is considered a non-concessional contribution;
• the client simply does not have enough assessable income to use the whole of the deduction — the balance is considered a non-concessional contribution; and/or
• the client ends up not claiming the deduction (though they have lodged a section 290-170 notice) — the balance is considered a non-concessional contribution.

The ATO has issued numerous notices to members advising of contributions exceeding relevant contribution caps, and advisers have subsequently tried to reverse the transactions or have them re-categorised in some way that reduces the excess contributions tax impacts.

Unfortunately, trustees are restricted by trust law. Contributions can only be undone when there has been a genuine mistake made in terms of the actual making of the contribution, not just a mistake in the understanding of the consequences.

Valid section 290-170 notices

It is important to make sure the section 290-170 notice is valid. A notice cannot be given when:

• the person is no longer a member of the fund;
• the balance of the account is less than the tax year’s personal contributions; and
• the trustee has commenced an income stream with all or part of the super contribution.

There are some interesting examples of what constitutes an invalid notice in the ATO’s Draft Taxation Ruling TR 2009/D3.

When is a contribution received?

Each year there is a rush to make sure appropriate contributions are in the superannuation fund prior to June 30. Many assume it has to be in the super fund’s bank account, but this is not the case.

The specific criteria for ‘received’ attracts special attention each June 30, particularly when it falls on a weekend. Draft Taxation Ruling TR 2009/D3 released by the ATO on June 3, 2009, revisits the question because of the ATO’s concern at the use of promissory notes for contributions to self-managed superannuation funds.

It states: “A superannuation contribution is made when it is received by the superannuation provider. An amount cannot increase the capital of the fund until it is received by the fund.”

Monies received can be very different from monies in the bank. This means that for the superannuation fund trustee to hold the contribution, it is not necessary to bank the cheque making the contribution.

However, cheques or promissory notes that are subsequently dishonoured are considered to have never been received. Post-dated cheques or post dated promissory notes are considered as received on the later of two dates — the date received or the date on which payment can be demanded.

It is imperative that an adviser has in-depth knowledge of the circumstances of their client, including all contributions the client might make or receive, to ensure there are no inadvertent breaches of the contribution caps.

Tips for advisers

• Ensure a client’s total concessional contributions for the year are accounted for. Watch out for periods of employment by a self-employed client, which may generate Super Guarantee employer contributions.
• Ensure a client lodges a valid section 290-170 notice prior to any rollovers or benefit payments, or prior to commencement of income streams.
• Caution must be exercised when a client has contributed an amount that is close to their non-concessional caps.
• Contributions split to a spouse continue to be counted towards the original member’s contribution limits, not against the receiving spouse’s contribution cap.
• Clients aged 65 can still take advantage of the three-year non-concessional limit, provided they were aged 64 at the start of the financial year in question.
• Section 290-170 notices cannot always be undone. Superannuation fund trustees cannot test that the client is able to claim a deduction.

Martin Breckon is a technical marketing manager at Aviva.