Discretion to disregard unlawful super payments

Where a benefit is paid to a super fund member who has not satisfied a relevant release condition what happens?

The benefit will normally be included in assessable income (by reason of Division 304 of the Income Tax Assessment Act, 1997) and taxed at marginal rates.  Section 304-10(4) confers a discretion on the Commissioner to exclude all or part of the benefit if the Commissioner thinks it would be unreasonable to include the entire benefit as assessable income.  The limits of this discretion were recently considered by the AAT

In Smith v Commissioner of Taxation, the taxpayer was a member of a Self Managed Superannuation Fund and, due to financial pressures, accessed $50,000 in the 2008 year and $37,000 in the 2009 year as benefits from the super fund.

The taxpayer had not satisfied a relevant release condition in either year, so the benefits were paid in breach of the prescribed payments standards.

The ATO included the two payments in the assessable income of the taxpayer.

The issue before the AAT was whether the Commissioner should exercise the discretion to exclude all or a portion of the benefits from assessable income.  The taxpayer argued that it was unreasonable for the payments to be treated as assessable income.  Reasons advanced were that the benefits were used to support the taxpayer’s business which, in turn, permitted the business to continue and were not used for personal consumption.

The AAT was unmoved and upheld the Commissioner’s decision to decline to exercise the discretion.  The AAT reasoned that to exercise the discretion as requested, would be to undermine the payment standards which, in turn, supported and implemented the retirement incomes objective of the superannuation system.

The AAT case dealt solely with the issue of whether the s304-10(4) discretion should be exercised.  Consequently, this case should not be treated as authority for the proposition that the only consequence of paying benefits in breach of the payments standards, is the taxation of those benefits at marginal rates.

Other issues will need to be considered: whether the breach of the payment standards was intentional and whether there was a breach of the sole purpose test (which is a civil penalty provision).  These other issues involve the possibility that the compliance status of the fund may be revised and that personal penalties may be imposed on the taxpayer.

Case Reference: Smith v The Commissioner of Taxation [2011]  AATA 563.