This article looks at the common situation of a superannuation fund trustee or administrator being asked to return a contribution or to re-categorise it. There are a lot of hidden risks involved in considering these requests. Trustees can mitigate their risk by documenting their general policy in relation to contributions made or categorised in error.
It is not uncommon in the superannuation industry for a member to ask the trustee of their superannuation fund to correct the categorisation of their contribution or to return a contribution made because of an alleged error.
At times the error could be regarded as a mistake either of fact or law and the contribution may be able to be re-categorised or returned.
When dealing with these requests it is useful to keep in mind that superannuation generally is preserved for retirement and cannot simply be paid back to the contributor. Before returning a contribution the trustee must satisfy itself that a mistake of fact or law has occurred.
So... What is a mistake?
A mistake is not an error about the tax consequences of a contribution
An often cited case in this context is Baird v BCE Holdings Pty Ltd.1 This is a New South Wales Supreme Court case involving a contract to transfer shares that had been fully executed.
A declaration was sought that the agreement was rescinded or alternatively that an order be made to rectify the agreement for mistake. The mistake was a misapprehension of the tax implications of the transaction.
Importantly, the court stated that equity would not interfere to carry out an intention that the parties did not have when they entered into a transaction, but which they might have had if they were properly informed about the law.
The court held that no mistake was made in putting the parties’ agreement into effect. The parties were under a misapprehension as to the tax implications of the transaction. This was an error in respect of the consequences of the operation of the instrument and not the type of error that the court will regard as a mistake justifying rectification. ‘There was no disconformity between the intention and the written instrument.’2
This case clearly shows that, where the supposed error is as to the tax consequences of a contribution and not the actual intention of making it, the contribution would not be able to be re-categorised or returned.
What does APRA say?
APRA, last year, released a Prudential Practice Guide about contributions and benefit accruals that contains its guidance on this issue.3
There is an acknowledgement that the correct way to respond to a request about mistaken contributions will depend on the circumstances of the case and the nature of the request made by the member (for example, to return, reverse, or otherwise deal with the contribution). Some of those specific scenarios will be covered in this article.
APRA states at paragraph 28(a) that administrative errors can often be rectified without reference to APRA if the trustee is satisfied that the contribution received by the fund was the subject of an administrative error.
The trustee must consider whether the contribution is valid and whether restitution or rectification would be available at law.
It is expected that the trustee’s satisfaction of an administrative error would be based on documentary evidence from the person who claims to have made the mistake. Examples of such administrative errors include the wrong person being paid in error, employer contributions that were overpaid as a result of a clerical error or contributions made by an employer for an employee that were not in accordance with the member’s instructions (subject to documentary evidence).
A trustee should have in place a policy to deal with requests concerning contributions made in error. This will assist in making consistent decisions about whether a mistake has occurred, whether the mistake concerning the contribution would justify the contribution being returned or otherwise dealt with, and what level of evidence the trustee would need.
APRA also states that there may be other errors (i.e. that are not administrative errors) where although the contributor may acknowledge that the contribution was valid at the time, extraordinary circumstances would warrant that it is considered for correction. A trustee is not authorised to correct these errors. However, an application can be made to APRA to modify the payment standards and allow the amount to be returned.
What has the court decided?
Personalised Transport Services Pty Ltd v AMP Superannuation Ltd & Anor4 was a case about an employer who made superannuation contributions for contractors under the mistaken belief that it was required to make those contributions to avoid incurring the superannuation guarantee charge. After discovering that it was not really required to make superannuation contributions for those contractors, the employer asked the superannuation fund trustee for the contributions to be returned on the grounds of mistake.
It was agreed between the parties that amounts already paid to beneficiaries or applied towards administration costs and insurance premiums would not be claimed.
The court held that, under the principles of unjust enrichment, because of the mistake under which the plaintiff was labouring, the payment would be recoverable unless the money had been on-paid or there had been some other change of position as a result of the payment. In this case, since the money remained with the trustee of the superannuation fund for the benefit of the beneficiaries and none of them had changed their position, restitution was therefore ordered.
What has the Superannuation Complaints Tribunal determined?
The tribunal’s determination in D06-07\129 involved a $1,000 contribution that the member claimed he paid to the trustee in error. The money was paid to the trustee by electronic funds transfer and was actually intended to be paid to the member’s real estate agent for his rent. The trustee did not repay the money.
The tribunal said once it is established that a mistake led to an overpayment, there is a prima facie entitlement to recover the money subject to exceptions. The tribunal accepted that mistaken overpayments to a superannuation fund are not contributions under SIS (and therefore are not preserved).
What has the ATO decided?
ATO Interpretative Decision ATO ID 2010/104 is important for a number of reasons. The ATO ID shows that, even when a trustee acts with the best of intentions, it must ensure that a contribution was in fact made as a result of a mistake before returning the amount. In this case, the trustee returned $200,000 of a $500,000 contribution to the member and the Tax Office still counted the entire $500,000 contribution towards the member’s non-concessional contribution cap. This was because the Tax Office did not agree that the contribution was made by mistake.
This ATO ID involved the transitional period before 1 July 2007 where a member was able to make up to $1 million in non-concessional contributions into a superannuation fund before 1 July 2007.
The member had made contributions amounting to $1.2 million into superannuation before 1 July 2007. The member asked the trustee to return $200,000 of a $500,000 contribution he made on the grounds that the excess portion of the contribution was made under a mistake. He claimed that his mistake was that he was unaware of the exact dates between which he could make the $1 million non-concessional contributions.
The Tax Office, however, considered that the entire $1.2 million were non-concessional contributions and must be counted towards the member’s cap despite the fact that $200,000 had been returned to the member.
The Tax Office noted:
- In the Personalised Transport case, a mistake of law caused the payment to be made to the enrichment of the fund.
- In the SCT decision mentioned above, there was a mistake of fact, being the identity of the payee.
- In APRA Circular II.B.1, APRA acknowledged that there is unjust enrichment where the trustee is the recipient of a contribution that was greater than intended because of a clerical, transcription or arithmetic error.
However, in this case, the individual had formed an intention to make the $500,000 contribution and gave effect to that intent. In these circumstances there had been an intentional contribution made and therefore it would not be unjust for the trustee to have retained the money.
Trustees need to take care
Trustees need to be careful when making decisions about requests to return contributions or to otherwise re-categorise the contributions. There is a difference between a contribution being made under a mistake of fact or law and a contribution made as intended but with unintended consequences.
Given the importance to members of such requests, particularly those who have exceeded their contribution caps, having a considered policy in place can assist trustees to properly and efficiently deal with these requests.
Where a member had the intention at the time to make the contribution but has exceeded their cap, depending on whether there are special circumstances and subject to time limits, the member may be able to apply to the Commissioner of Taxation to have the amount disregarded or counted towards their caps in another financial year.5
If a trustee returns contributions where there is no mistake the Tax Office may well count the amount towards the relevant cap in any case. The trustee may also breach preservation rules and payment standards.