Excess Contributions Tax – Not Good News

Background

A recent decision of the Administrative Appeals Tribunal has again highlighted the tripwire nature of excess contributions tax.

The relevant facts of the case can be briefly stated.  The taxpayer sold his farm in early January 2006 and was advised to make substantial superannuation contributions from the sale proceeds. By June 2007, the taxpayer had not received the sale proceeds, so he borrowed money in order to make substantial contributions before 30 June 2007.  This date was significant in that it was the close off date for the $1m non-concessional contribution cap which applied in the period 10 May 2006 to 30 June 2007. 

The intention of the taxpayer was to utilise the $1m cap by making a final contribution of $700,000.  The taxpayer had previously contributed $300,000 in July 2006. 

Unfortunately, the taxpayer had also made a contribution of $150,000 sometime between 10 May 2006 and 30 May 2006.  Consequently, the taxpayer’s contributions for the transitional period were therefore $1,150,000 which exceeded the $1m cap by $150,000.

Once the member contribution information for the 2005/06 and 2006/07 financial years was processed by the ATO, the excess contribution of $150,000 was identified and the ATO advised the taxpayer in August 2009 of its intention to issue an excess contributions tax assessment.
 
Amended member contribution statements were then lodged which reduced the taxpayer’s non-concessional contributions by $150,000 and increased the non-contributions for the taxpayer’s spouse by the same amount.


How the ATO dealt with the amended contributions statements

The taxpayer advised the ATO that a genuine allocation error had been made.  It was noted that the contribution in question had been made from a joint bank account in the name of the taxpayer and his spouse - so the contribution could have been made by the spouse.  Further, it was argued that it was reasonable to infer that the taxpayer would not intentionally exceed the transitional cap where there was sufficient scope for the taxpayer’s spouse to have received the contribution without breaching her transitional cap.  The taxpayer also provided signed trustee minutes dated 29 June 2007 which indicated that the $700,000 contribution was to be allocated $550,000 to the taxpayer and $150,000 for the spouse.

The ATO was unmoved by these arguments and by the signed minutes.  Consequently, the ATO issued the excess contributions assessment notice based on the $700,000 contribution being entirely allocated for the taxpayer thereby giving rise to a $150,000 in excess non-concessional contributions.

How the AAT dealt with the matter

On appeal to the AAT, the AAT was also unmoved by the taxpayer’s arguments (and signed minutes) and upheld the excess contributions assessment notice. The AAT noted (as did the ATO) that the minutes supporting the increase in the non-concessional contributions for the spouse were not signed at or shortly after the time the $700,000 contribution was made but were clearly prepared sometime later notwithstanding the apparent signing date.

The reasoning of the AAT was that whether the $700,000 contribution was entirely made for the taxpayer or partly for the taxpayer and his spouse was to be determined by their intention at the time the contribution was made.

The AAT noted that it was only after the taxpayer was advised by the ATO of the potential of an excess contribution that he lodged revised member contributions statements and prepared minutes as to the contributions.

Also, the AAT agreed with the ATO that the excess non-concessional contribution could not be repaid on the basis of payment made under a mistake as the $700,000 was clearly intended as a contribution and exceeding the transitional cap is merely a consequence of making the payment.  

In conclusion, the AAT noted the distinction between objective and motive.  In the present case, the taxpayer’s objective was to allocate $700,000 to his member’s account.  What the taxpayer hoped to achieve – his motive – was to maximise the benefits available under the transitional cap applying to contributions made during the period 10 May 2006 and 30 June 2007. 

The AAT stated “The fact that he failed to realise his goal was not the result of a clerical error or a misconception as to an existing obligation, but rather the result of a misunderstanding as to the ultimate consequences of a conscious act.   The {taxpayer’s} mistake – or the mistake by his advisers if that is where the fault lay – cannot be rectified retrospectively.  A taxpayer cannot retrospectively reorganise his affairs simply on the basis that the Commissioner has disallowed his original strategy. The {taxpayer} in this instance proceeded with a particular cause of action, which proved to be inappropriate”.

Lessons from the case

Excess contributions are another instance of tripwires in superannuation.  A breach can have material consequences.

The importance of keeping accurate records of past contributions and the allocation of contributions is paramount.  

Further, documents which are brought into existence to confirm or support the correct allocation of contributions once the contribution error has been identified by the ATO, are highly unlikely to persuade either the ATO or the AAT.

Finally, the argument that a contribution is in error (and thereby can be reversed) merely because the taxation consequences of the contribution are not those intended by the taxpayer, will not find favour with either the ATO or the AAT.

The case reference is AAT [2011] AATA 839.  The quoted text is taken from paragraphs 45 and 46 of the decision.