Excess contributions - new life in mistake - UK Supreme Court case

While the Government has announced measures to deal with the issue of excess concessional contributions, which arise on and from 1 July 2013, the problem of excess non-concessional contributions remains.

Consider the situation where an SMSF member has derived a capital gain to which the small business CGT concession applies and the member wishes to contribute the gain to their SMSF.  Special contribution caps apply to CGT contributions (ie contributions sourced from CGT 15 year concession or the retirement concession).  The special contribution cap is a lifetime cap which is $1,315,000 for the 2013/14 financial year.

The member has not previously utilised their CGT contribution cap and during the 2013/14 financial year contributes $450,000 as a (ordinary) non-concessional contribution and $1,315,000 as a (CGT) non-concessional contribution. So far, so good.

However, if the $1,315,000 contribution was not a CGT contribution then the member will have an excess contributions tax liability of $611,475.  

A recent UK Supreme Court decision may be relevant.  Previously, it had been held that a gift cannot be rescinded on the basis of mistake if the mistake is to the consequences of the gift.  In the case of Pitt v Holt, the UK Supreme Court held that a mistake as to the consequences of a gift could, if sufficiently serious, permit the Court to rescind the gift.  

In the case of Pitt v Holt, Mrs Pitt (acting on advice) created a trust called a “special needs trust”, to receive compensation payments in respect of a very badly injured husband.  Mrs Pitt, as the legal personal representative of her husband, contributed a significant amount of the compensation payments to the trust.  Unfortunately, neither Mrs Pitt nor her professional advisers realised that the UK Inheritance Tax applied to the trust, thereby very significantly diminishing the value of the trust.  In fact, Mrs Pitt could have established the special needs trust in such a way that it did not attract Inheritance Tax.

While Mrs Pitt may have had remedies against her professional advisers, she sought to rescind her contribution of the compensation payments on the basis of her mistake as the taxation consequences of making such contributions.  The UK Revenue authorities objected and argued that a mistake as to the consequences of a contribution is not a sufficient ground on which to permit the Court to rescind the contribution.

The UK Supreme Court held that Mrs Pitt’s mistake was sufficiently serious to warrant the setting aside of the contributions.  

The decision in Pitt v Holt is authority that the SMSF member’s mistake as to the character of the $1,315,000 contribution – that it did qualify as a CGT non-concessional contribution when it was not – is sufficiently serious – to the tune of $611,475 – to warrant a court to rescind (ie set aside, undo) the contribution on the basis of mistake.  Rescission is a discretionary remedy and the court may decline to order rescission if third party rights are involved.  However, in the context of superannuation contributions, the issue of third party rights is unlikely to arise.

Reference: Pitt v Holt (The Commissioners for Her Majesty’s Revenue and Customs) [2013] UKSC 26.  The Supreme Court has replaced the House of Lords as the highest UK Court.