Excess contributions are an ongoing issue for superannuation advisors and members. Recent figures indicate that the Commissioner of Taxation exercises his discretion to disregard or reallocate excess contributions in approximately 2% of cases. Further, the view of the Australian Taxation Office is that its hands are tied and that it is administering the law as Parliament intended.
Importantly, the Federal Court has confirmed in Commissioner of Taxation v Administrative Appeals Tribunal that the Administrative Appeals Tribunal was correct in determining that it does not have jurisdiction to review a decision of the Commissioner not to exercise his discretion to disregard or reallocate excess contributions.
However, it is important to remember that in certain limited circumstances, an amount paid to a complying superannuation fund can be returned.
Fund capped contributions
It has been well canvassed that the superannuation law requires an amount above a member's non-concessional contribution cap to be returned where the cap is breached by a single contribution pursuant to regulation 7.04(3) of the Superannuation Industry (Supervision) Regulations 1994. Therefore, a trustee must return all or part of a single 'fund-capped contribution' where:
- it is a non-concessional contribution over $150,000 for a member aged 65 or more on 1 July of the financial year; or
- it is a non-concessional contribution over $450,000 for a member aged 64 or less on 1 July of the financial year
What is not as well known is that a payment to a superannuation fund by mistake can form the basis for returning the amount to the member without penalty.
Payments by mistake
Consistent with case law, decisions of the Superannuation Complaints Tribunal and the view of the Australian Prudential Regulation Authority, the Commissioner of Taxation in ATO ID 2010/104 has acknowledged the following circumstances as situations in which the trustee is unjustly enriched by the payment to the fund, the result being that restitution of the amount should be made to the member:
- a contribution is made in the mistaken belief that the contribution is required under superannuation law;
- a payment is made to the wrong entity; or
- an incorrect amount is contributed because of a clerical, transcription or arithmetic error.
Where a member has excess contributions, it is important to review amounts contributed to a fund to ensure an error has not been made, such as contributing $50,000 to the fund instead of $5,000 or making a mortgage repayment to the wrong account.
However, the Commissioner takes the view that a mistake as to the effect of a contribution, for example that it gives rise to an excess contributions tax liability, is not sufficient to provide a ground for restitution on the basis of unjust enrichment.
If the circumstances do not fit into those listed above and the excess amount is returned to the member, the returned amount could be treated as an early release or a loan to the member, depending on the facts. In either scenario, the member is likely to breach the SIS Act. Further, the member will still be liable for the excess contributions tax on the excess amount and the amount withdrawn may also be taxed at the member's marginal rates as income.
Power to return amounts
The trustee must have the power in the trust deed for the fund to return an amount paid to the fund in excess of the non-concessional contributions cap or by mistake. While Taxpayer Alert TA 2010/2 has cast some doubt over clauses that permit the trustee to return amounts paid to the fund, it is clear that in certain circumstances not only does the Commissioner envisage returning such amounts being necessary, the trustee is required to do so under superannuation law.
Taxpayer Alert TA 2010/2 addresses arrangements where a clause is inserted into a superannuation fund trust deed in an attempt to circumvent excess contributions tax.
The Alert applies to arrangements where the trust deed is amended to include, or established with, a clause that is designed to prevent a member from incurring an excess contributions tax liability:
- by preventing the trustee from accepting contributions above the member's contribution caps;
- if contributions are made which exceed the member's contribution cap the excess amount is held under a separate trust; and
- the trustee is obliged to return the excess amount along with any corresponding earnings to the relevant member on the basis that the amount was never in fact accepted by the trustee and part of the assets of the fund.
The Commissioner has reviewed these arrangements and considers that they are ineffective and that administering a SMSF in accordance with these clauses may breach the sole purpose test.
In our view, whether a clause in a trust deed is effective from a tax perspective is a separate question to whether a clause of the nature described is legally effective as a matter of trust law. It is clear from the Bamford case that the terms of the trust deed govern the operation of a trust. Given that a superannuation fund is in fact a trust and that general trust law principles apply unless modified by a statutory provision, a clause in a trust deed that imposes further restrictions or obligations on a trustee in addition to any legal requirements will be valid if it complies with trust law requirements.
The Alert raises the potential application of the promoter penalty regime to entities involved in these arrangements. In the media release made in relation to the Alert, Tax Commissioner, Michael D'Ascenzo said that 'anyone involved in or considering these arrangements should be aware that they face close examination by the ATO.'
In contrast, we take the view that the inclusion of a clause requiring mistaken payments or fund capped contributions to be returned is not a scheme or arrangement to which the Alert would generally apply.