Excess super contributions tax: don’t get caught

There have been many changes to superannuation and related tax laws over the last couple of years, most notably the exemption of super payouts for those over 60.

More recently, as we would all know, the concessional superannuation contributions cap has been reduced from $50,000 to $25,000 per annum (indexed) for the 2009-10 and later financial years. The transitional concessional cap for those aged 50 and over has also been reduced from $100,000 to $50,000 (not indexed) for the 2009-10, 2010-11 and 2011-12 financial years – this applies to those who have taken out the so-called transition to retirement pensions.

In broad terms, concessional super contributions include the 9% employer contributions, and any salary sacrificed super contributions made by an employer.

The Tax Office is keen to ensure people are aware of the new limits. If the limits are breached, penalties apply in the form of what is called an excess contributions tax (ECT).

The Tax Office is planning to send information to taxpayers whose contributions might be close to the caps and who are:

• Under 50 years of age on 30 June 2010 and whose previous concessional contributions total more than $22,500 (ie. to allow for salary increases, etc); and
• 50 years of age or more on 30 June 2010 and whose previous concessional contributions total more than $45,000.

ATO identification of excess contributions

The Tax Office identifies cases where the contribution caps have been exceeded via the information contained in member contributions statements (MCSs) which superannuation funds are required to lodge annually. The Tax Office then matches the MCS information to individual income tax return data to calculate the amounts of concessional and non-concessional contributions. Where an income tax return is not lodged, an ECT case will be triggered in appropriate cases by MCS data alone.

Where it appears that a contributions cap has been exceeded, the Tax Office says it will send a pre-assessment letter to the individual. The letter sets out the information the Tax Office has and provides the individual with the opportunity (within 28 days) to respond and/or correct the information.

In appropriate cases, the Tax Office will raise an ECT assessment and the individual will be provided with a release authority (ie. an authority for the funds to pay for the amount of the tax due to be released from the super system). In cases where the non-concessional contributions cap (ie. the limit that applies, for example, to personal after-tax super contributions to a fund – is $150,000 for 2009-10) is exceeded, use of the release authority is compulsory and the Tax Office says it will follow up to ensure that an amount equal to the tax assessed is released from the superannuation system.

The Commissioner warns that time limits apply to the use of release authorities, and the ATO has the power to issue its own release authority direct to a fund where a compulsory release authority has not been presented as required.

Commissioner’s discretion to reallocate contributions

Of course, under the law, people can object to ECT assessments, and the Tax Commissioner has discretion to disregard or reallocate contributions after an assessment has been raised. Use of the discretion is restricted by law to “special circumstances”.

While precise rules don’t apply to what constitutes special circumstances, the ATO says the core idea of special circumstances is that there is something unusual to take the case outside the ordinary course. However, the Commissioner notes that a simple error or oversight in relation to exceeding a cap is not considered to be a special circumstance justifying relief from a primary tax liability.

Tax Office action

The Tax Office says it has raised in excess of 500 ECT assessments, totalling about $19 million, in respect of breaches of the $1 million transitional non-concessional contributions cap which applied to contributions between 10 May 2006 and 30 June 2007.

The Commissioner has noted that the unusual length of the transitional period means that the Tax Office has had to go through a complex review and profiling process, typically seeking more detailed clarifying data from funds.

As at August 2009, the Tax Office said it had not commenced issuing pre-assessment letters for excess super contributions during 2007-08. This is expected to commence after deployment of a new processing system (due from July 2009).

The Tax Office also conducted a mail-out in May 2009 to individuals identified as apparently exceeding a contributions cap. The purpose of the mail-out was to allow for the correction of potential data errors (recognising that this was the first year of revised reporting requirements for funds). Current indications are that there are likely to be in excess of 40,000 excess contributions cases relating to the 2007-08 year, the Tax Office said.

Typical contributions reporting errors

The Tax Office said its May 2009 mail-out identified a variety of super fund reporting errors that almost invariably involve contributions being reported at the wrong label. These errors typically involved reporting an amount of personal super contributions (claimed as a personal superannuation deduction) as employer contributions, sometimes based on incorrect information provided by a fund member.

The ATO is working with funds to assist in correcting these errors before proceeding to any pre-assessment action.

Retrieving contributions made by “mistake”

The Tax Office has recently seen some cases where individuals have sought the return of an amount of super contributions they made “by mistake”, where the amount of the mistaken contribution is said to be the amount of their excess contributions.

The Tax Office takes the view that restitution will only be appropriate where it is the relevant mistake that causes the contribution. However, a mistake as to the consequences of a contribution will not be sufficient to establish a claim for restitution.

The Tax Office considers that once a contribution is accepted by a super fund, the preservation rules apply whereby an amount of a contribution made to the super fund can only be returned in the limited circumstances outlined in the law (ie. where one of the contribution standards is not met).

According to the Commissioner, a payment in the nature of a genuine mistake which, at the time of making the payment was not intended to be a contribution, may be refunded to the payer. In these circumstances, the Tax Office says a payment made under a genuine mistake will be treated as being held on a separate trust and not held as part of the fund itself.

However, in the ATO’s view, a super contribution which is later regretted due to the excess contributions tax or other consequences (such as not being deductible) cannot be refunded by the super fund trustee.

In a 2006 case before the NSW Supreme Court, although the contributing company intended to contribute to the relevant super fund in respect of independent sub-contractors (not employees), it did so only because it mistakenly believed it was obliged to do so by the relevant law – the Superannuation Guarantee (Administration) Act 1992. This mistaken belief caused the super contribution to be made. In another case, the Superannuation Complaints Tribunal accepted that a super fund member did not intend to contribute his rent money inadvertently paid to the fund. The Tribunal accepted that mistaken overpayments to a superannuation fund are not “contributions” under the superannuation law.

The seemingly continuous changes to laws affecting superannuation don’t necessarily make it easy for people and businesses to readily comply with the laws. The recent changes to the superannuation caps can certainly trap the unwary. The ATO is trying to help and is keen to make sure people understand the rules. If in doubt, get professional advice.