Superannuation: Fixing cap breaches

Recently the Australian Taxation Office (ATO) contacted around 24,000 individuals to alert them to the fact that they have been identified as potentially exceeding one or both of the contribution caps in 2007-08.

The ATO has also announced that additional mail-outs later in the financial year could be made when further 2007-08 contributions data is received.

Clients who have received, or are likely to receive, ATO notification that they have exceeded their contribution cap may contact their financial planner for advice. Financial planners should consider all of the options available to assist the client because the client may otherwise pursue formal legal action.

It is therefore critical that both clients and advisers are aware of the following measures to help reduce or eliminate otherwise excessive contributions.

Check super fund transaction history

The ATO has acknowledged that incorrect reporting of superannuation contributions and ATO data matching errors may be a major cause of clients exceeding their contribution caps.

Reasons why this may occur include:

• super funds reporting the incorrect amount of the contribution and/or type of contributions. For example, concessional contributions may be reported as non-concessional because the fund has not properly adjusted the contribution type after receiving the member’s valid notice to claim a tax deduction;
• the ATO has failed to identify amounts that are exempt from the caps (eg, certain personal injury payments and proceeds of up to $1 million (from 2007-08 indexed) received from the sale of certain small business assets); and
• contributions reported electronically may be misread by the ATO’s systems. For example, the ATO may record contributions received twice or contributions made for each member of a couple as belonging to only one member.

It is therefore important to check not only the ATO’s data against the member’s transaction statements but also the data being reported by the super fund to the ATO, such as the amount and type contributed.

Cancel the transaction if not yet processed

It may be possible to cancel a contribution if it has not yet been processed to the fund accounts.

This may depend on how the contribution has been sent and the timeliness of the fund’s administration process.

For example, one of our funds requires cancellations of deposits or contributions to be received by the transaction cut-off time (ie, 3pm on a NSW business day). This means the instruction to cancel the contribution must be given by 3pm on the day the contribution is made.

If the contribution has been sent by cheque, it may be possible to either cancel the cheque or have it returned by us upon instruction, noting the above cut-off times.

For electronic transactions, for example BPay, direct debit or direct credit, a cancellation instruction must also be provided by 3pm on the day the funds are received.

Once a contribution has been received and processed to the fund accounts it is subject to the super preservation rules and generally cannot be refunded (unless some other exception, as discussed below, applies).

Apply to the trustee for a refund if the contribution was made in error

A fund trustee may refund contributions, including excess contributions, made as a result of a genuine mistake.

For example, if a member incorrectly transfers money electronically into their super fund account rather than a personal bank account, they may apply to the trustee for a refund of the contribution.

If the member did not intend to contribute to their fund at all, the remedy of restitution can place the member in the position they were in prior to the mistake being made.

For this reason, interest is generally not payable by the fund trustee on refunded contributions unless, for example, there has been an unreasonable delay by the trustee in refunding the contributions.

Note that if a trustee has received a contribution in good faith (not knowing the contribution was made by mistake), under the defence of ‘change in circumstances’ it may not be required to refund fees, costs, taxes and premiums on the basis that these services have already been provided.

Additionally, any negative returns and the cost of investing the contribution paid by mistake are unlikely to be recoverable, particularly where the position is irreversible. This means the member may only be entitled to recover the contribution made by mistake net of these amounts.

It is the ATO’s view that a mistake as to the consequences of a contribution will not be sufficient to found a claim for restitution.

For example, a contribution made in the reasonable belief that it will not exceed the member’s contribution cap would not, in the absence of other factors, be the subject of a claim for restitution.

Note that determining when restitution is appropriate is complicated, and specific legal advice should be sought on the circumstances of each case.

Apply to the ATO on the grounds of special circumstances

Contributions that would have otherwise been treated as excess contributions may be determined by the commissioner to be disregarded or reallocated to another income year.

The application must be made using the ATO’s approved form within 60 days of receiving an excess contributions tax assessment.

The ATO has indicated that a determination will only be issued where the taxpayer can demonstrate that special circumstances exist and making the determination is not inconsistent with the intended operation of the caps (ie, that it was unjust, unreasonable or inappropriate to impose the liability for excess contributions tax).

In making a determination, the commissioner may have regard to whether the excess contributions were reasonably foreseeable and whether, in particular, the investor had control over the timing or making of the contributions.

Accordingly, there may be some scope to apply to have contributions disregarded or allocated to another year if the contribution is made by the member’s employer or other person, such as a family member or friend.

An unforeseeable delay in banking or depositing errors may also be taken into account.

It is otherwise unclear in what circumstances the ATO may exercise its discretion. However, an application may still be worthwhile, particularly in cases where there was no intention to breach the caps and the objective is not inconsistent with limiting the amount a person may contribute to the concessionally taxed super environment.

This could potentially include, for example, a member engaged in a re-contribution strategy because the same money has remained in the super system or members who were indecisive and contributed and withdrew in a short period of time.

Further considerations and possible remedies

Vary deduction notice or lodge a notice to claim a deduction

For clients eligible to claim a tax deduction, it may be necessary to consider whether the contributions are best treated as non-concessional personal contributions or concessional deductible contributions.

A client who has made personal tax-deductible contributions during the year may wish to reduce the amount of the deduction (including to nil) to minimise or eliminate their otherwise excess concessional contributions and instead have those contributions assessed against their non-concessional cap.

Alternatively, a client who has otherwise excessive non-concessional contributions may wish to consider lodging a valid notice so the contributions are instead assessed against the concessional cap.

This may reduce or eliminate the excess non-concessional contributions (as long as the deduction does not create an excess concessional contribution).

Importantly, both scenarios assume the notice is given, or variation made, before the client lodges their tax return and within 12 months of the year the contribution was made.

Determine whether June contributions may be allocated to the following financial year

In relation to accumulation interests, a trustee must allocate a contribution to a member of the fund within 28 days after the end of the month in which the trustee received the contribution.

The contribution will count towards the member’s cap for the financial year that it is allocated to the member’s account, not the financial year that the contribution was made.

SMSF trustees, for example, may therefore allocate otherwise excessive contributions made in June to the member’s account in the following financial year (but within 28 days of the end of the month).

Determine whether the trustee has an obligation to return the contribution

Under the superannuation regulations, contributions that breach one of the following contribution standards must be returned by the fund within 30 days of becoming aware of the breach:

• an amount received is in breach of the age and related work test conditions;
• personal contributions where no tax file number has been quoted (unless the tax file number is quoted within 30 days of the amount being received); or
• single non-concessional contributions that exceed $450,000 (or $150,000 if the member is aged 65 but less than 75 on July 1). An exception applies if the trustee receives a valid personal deductible contribution notice within 30 days of receiving the amount.

Note that trustees must still refund the contribution even after 30 days have elapsed (refer ATO ID 2009/29).

Sam Wall is head of technical services at Colonial First State.