Tax decision an excess contributions bombshell

Specialist barrister Noel Davis explains the ramifications of the latest AAT decision relating to excess contributions and why trustees, members and employers should all be concerned.

The practice of some of the financial institutions and superannuation funds of receiving contributions in a clearing account and only transferring the contributions into the superannuation fund bank account at a later date is causing members to be taxed on excessive contributions – and it is causing employers and individuals to miss out on tax deductions for the contributions.

That has been happening when contributions have been paid towards the end of a financial year but not transferred to the superannuation fund’s bank account and credited to the members’ accounts in the fund in the next financial year.

When added to other contributions in the latter year, it sometimes gives rise to excessive contributions which are adversely taxed.

In a recent case in which I appeared in the Administrative Appeals Tribunal (Verschuer’s case), an employer paid a contribution for a director of some $91,000 on 27 June 2008 to a superannuation fund conducted by a financial institution, which was paid directly into a clearing account of the trustee of the fund, in accordance with its usual arrangement.

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The contribution did not get transferred from the clearing account to the trustee’s superannuation fund bank account until 23 July 2008.

The superannuation fund, in its return to the Australian Taxation Office (ATO), treated the contribution as having been paid in 2008/09 rather than the 2007/08 year in which the contribution had been paid by the employer.

The ATO, therefore, treated it as a contribution made by the employer in 2008/09.

The member, unaware that this had happened, even though she checked with the employer on what contributions had been paid for her in 2008/09, made a personal deductible contribution of $90,000 to her self-managed superannuation fund (SMSF) in May 2009.

The $90,000 personal contribution, when added to the employer contribution of $91,000 plus SGC contributions, resulted in an excessive deductible contribution for 2008/09 of some $89,000, the tax on which was nearly $70,000, a tax rate of 78per cent.

That rate resulted from the excessive contribution being taxed as both an excessive concessional and non-concessional contribution, in accordance with what the legislation says.

When the contributions tax of 15 per cent that was levied on the excessive contribution is added to the 78 per cent excessive contributions tax rate, the total tax rate on the excessive contribution was 93 per cent.

A submission that has been made to the government that the legislation should be amended to avoid this outcome has not resulted in any change.

The tribunal affirmed the tax assessment and, in doing so, decided that the employer contribution had been made in July, not when it was paid to the trustee’s clearing account on 27 June.

The tribunal also refused to exercise the discretion granted by the legislation to treat the contribution as having been made in 2007/08, if it was made in the next income year.

It was submitted to the tribunal on behalf of the taxpayer that, as the clearing account was held by the trustee of the superannuation fund, the contribution had been made to the superannuation fund in the year in which the employer had paid the contribution into that account (2007/08), but that submission was not referred to in the tribunal’s decision.

The effect of the Tribunal’s decision is that a contribution paid into a clearing account is not “made” for the purposes of the tax legislation until the contribution is transferred from the clearing account to the superannuation fund’s account.

That has significant tax implications for all employers who pay contributions for their employees into clearing accounts, and their auditors.

Under the tax legislation, a contribution is only tax deductible in an income year in which it is “made” to a superannuation fund.

If a contribution paid into a clearing account towards the end of a financial year is not transferred from the clearing account to the superannuation fund’s account until the beginning of the next financial year, the employer is not entitled to a tax deduction for the contribution in the year in which it was paid by the employer.

Employers, large and small, who pay contributions to clearing accounts will therefore need to check whether each such contribution got transferred from the clearing account before the end of the financial year, in order to avoid incorrectly claiming deductions.

Another issue for employers arising from this case is that it was argued on behalf of the Commissioner that a contribution is not made until it is credited by the trustee to the account of the member in the fund. That argument was not referred to in the tribunal’s decision.

However it is implied in paragraph 65 of the tribunal’s decision that it agreed with that submission.

If that proposition is correct, it imposes another hurdle on employers in determining whether they can claim deductions for contributions paid in an income year, regardless of whether the contributions are paid to a clearing account.

Employers will need to check whether the contributions that they have paid were credited by the superannuation fund to each employee’s account in the fund by the end of the financial year, to determine whether the contributions that have been paid are tax deductible in that year.

There are many reasons why there are often delays in crediting contributions to members’ accounts, including that checks sometimes need to be made on information provided by employers to ensure that contributions are credited to the correct members.

That can sometimes take weeks to resolve.

The burden that that will impose on employers, particularly employers with thousands of employees who are members of a number of different funds, is readily apparent.

This proposition, if correct, has another ramification. The Government makes co-contributions for contributions made in relation to low income earners in each year.

If contributions are only made when they are credited to members’ accounts in the fund, trustees can only include in their returns, for co-contribution purposes, contributions that got credited to the accounts of the members during the course of an income year; they will not be able to include contributions that were received in the income year but did not get credited to the members’ accounts in the fund during that same income year.

Members whose contributions do not get credited to them in the fund by the end of a financial year will, therefore, miss out on co-contributions if they are not still eligible for co-contributions in the following income year.

If the issues referred to above are not resolved by legislative change, the administration of superannuation is about to become more difficult for employers, trustees and members than it already is – and some low income earners will miss out on co-contributions because of these provisions.

Also, some members will continue to be adversely taxed, through no fault of their own, on contributions that are paid towards the end of a financial year but are regarded under the technical provisions of the Tax Act as not being made in that financial year and result in excessive contributions, when added to other contributions made in the next income year.

With the maximum concessional contribution reduced to $25,000 this financial year, excessive contributions will arise more readily than they have in the past, when more than 40,000 excessive contribution tax assessments have been issued yearly. 

However, in the current economic circumstances, the Government may be appreciative of the additional revenue from excess contributions and missed deductions. If so, legislative intervention may not be forthcoming. 

Noel Davis is a Sydney barrister and Superannuation Complaints Tribunal panellist.