Superannuation tax penalties don't fit the crime

Concerns about the lowered excess super contributions caps and the increasing number of breaches of them were raised today in a couple of sessions on day two of the Self-Managed Super Fund Professionals’ of Australia (SPAA) conference in Melbourne.

There was quite a heated response from delegates during Minister for Financial Services, Superannuation and Corporate Law Chris Bowen’s opening session, when an adviser explained that under the new rules a client of his had inadvertently exceeded the limits, incurring a 93 per cent tax penalty.

David Shirlow, executive director at Macquarie Bank, said that had he and Tony Simmons of PKF detailed a case study that they were later to explain during their own session, “I think we would have had some security issues”.

The scenario that they went through with delegates ultimately revealed that the client was hit by a 108 per cent tax rate.

“There’s clearly a policy weakness if you have an outcome and effective tax rate like this,” said Shirlow.

He said the Government’s standpoint at the time the contributions limits were halved was that the penalties were stringent so that people would learn very quickly. However, he asserted that excess contributions happen again and again inadvertently.

Shirlow and Simmons said the five typical traps they have identified include: assuming that a particular transaction involving a payment is not a contribution when in fact it is; the poor timing of the contribution and when it is received by the trustee; the contribution being undervalued in specie, due to wrong timing; wrong classification of a contribution; and the client overlooking contributions they’ve made in the relevant period.

Shirlow said the Australian Taxation Office (ATO) might be able to solve these issues by reversing the tax rate or allowing contributions to be reallocated to the next year in ‘exceptional’ circumstances.

Simmons noted that ‘exceptional’ or ‘special’ circumstances do not include financial hardship, ignorance of the law and incorrect professional advice.

He added that the ATO is not interested in ‘inadvertent’ mistakes.

Simmons said there should be some lenience shown towards people who have made understandable mistakes.

“At the very least, I don’t think the punishment fits the crime,” he said, adding that there needs to be a change to the law. But in the meantime, part of the solution is increased education and tighter management procedures to avoid penalties, he asserted.