Top 5 strategies for avoiding excess contributions tax

David Court lists the top five strategies for avoiding the excess contribution tax.

The application of the excess contributions tax (ECT) regime continues to cause problems for taxpayers.  This article will look at various strategies open to a person who is at risk of receiving an ECT assessment.

1. Avoiding excess contributions

The simplest strategy to avoiding an ECT assessment is not to trigger one in the first place. Keeping a careful track of superannuation contributions against the contribution caps is a first step - especially for taxpayers with multiple employers.  

Particular vigilance is warranted around the end of the financial year, as one of the common reasons that taxpayers receive ECT assessments is due to contributions falling into the wrong financial year.

In particular, bear in mind that the 28-day leeway after the end of a financial year that applies to superannuation guarantee contributions does not apply for ECT purposes. Also, be aware of what amounts constitute a contribution - they can include transactions such as expense reimbursement or debt forgiveness.

2. Non-acceptance and allocation of contributions

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A superannuation fund may not accept non-concessional contributions that are, in themselves, in excess of the contribution caps.

Accordingly, if a taxpayer has inadvertently made a non-concessional contribution in excess of the cap, then the taxpayer can simply request that the contribution be returned by the trustee of the receiving fund.

It may also be possible in particular cases to avoid incurring ECT (or reduce the amount of ECT) through having the relevant fund "move" contributions received in June of one financial year to the next financial year.

This requires the trustee of the fund to retain the contributions in an unallocated reserve until after the end of the financial year.

However, the contribution must then be allocated to the member's account before 28 July. Practically, this strategy would likely only be of use with an SMSF where the trustee/member unexpectedly received a contribution knowing that they were already close to (or over) their cap.

3. Just a little bit over

The ATO has announced that it will ignore (at its discretion) small breaches of the concessional cap that lead to a breach of the non-concessional cap and result in a large tax liability.

The ATO will allow the excess contribution to be refunded to the taxpayer or permit the taxpayer to re-contribute the amount if ECT has already been paid.

The ATO concession is based on the de minimis principle - that trivial or trifling things should be ignored. However, the ATO has not nominated any dollar amount as being the cut-off point. There are some indications that breaches in the thousands of dollar range may qualify.  

The ATO has indicated that it will contact taxpayers in this situation. However, there is nothing to prevent a taxpayer from applying to the ATO for the benefit of this concession if the taxpayer has not already been contacted by the ATO.

4. Up to $10,000 over

The potential severity of the inadvertent breaching of the concessional cap has also been mitigated somewhat by changes to the legislation which permit a one-off refund of excess concessional contributions to a member where the excess contribution amount is $10,000 or less.

This concession only applies to the first breach of the concessional contribution cap after 1 July 2011.

However, if a member does not accept the first refund "offer" from the ATO, they will no longer be eligible for a refund in a later year (although strategies 3 and 5 would still, potentially, be open to a taxpayer who has lost eligibility).

Any amount refunded will, effectively, be taxable to the member at his or her marginal tax rate.

To achieve this, a tax offset will apply for the contribution tax paid in the fund.

 The fund must refund the excess contribution to the ATO rather than direct to the member.

This refunded amount will then constitute a refundable tax credit against the member's overall tax liability.

Affected taxpayers should expect to receive an offer from the ATO at some point.

However, a taxpayer could approach the ATO requesting that an offer is made if the taxpayer considers that they have been overlooked.

5. A lot over 

In anticipation that unintended hardship might arise with ECT, the legislation has always given the ATO discretion to either disregard excess contributions or reallocate them to another tax year.  

However, the ATO may exercise such discretion only if it considers that 'special circumstances' apply and that the determination would be consistent with the object of the ECT legislation.

A taxpayer wishing to avail themselves of the ATO discretion must apply to the ATO in the first instance. If unsuccessful, it is possible to challenge the ATO's decision at the Administrative Appeals Tribunal (AAT).

In practice, it has proved very difficult for taxpayers to satisfy the 'special circumstances' requirement. A number of appeals from ATO decisions have been heard by the AAT, with the unsuccessful taxpayers considerably outnumbering those who were successful.

This difficulty would appear to be one of the main drivers behind the later introduction of the concessions described in strategies 3 and 4 above.

Requesting the exercise of the ATO discretion in this manner is likely to be a last resort for the taxpayer, and challenging the ATO's discretion in the AAT has the potential to be a lengthy and costly exercise. 

David Court is a lawyer at Holley Nethercote Commercial Lawyers.