Excess Contributions Traps - War stories from the front!

The issues with Excess Contributions continue.
 
The following war stories clearly illustrate the difficulties for both advisers and their clients.  They also present a timely reminder of how excess contributions can arise.

Establishment costs -  A client wished to maximise their non-concessional contributions by adopting a $150,000/$450,000 strategy under which $150,000 is contributed in Year 1 and then $450,000 is contributed in Year 2, so exhausting the non-concessional contributions cap for Years 2, 3 and 4.  So far so good.  

A new fund was established for this purpose.  The contributions were duly made.  However, in respect of the fund’s annual return for Year 1, the establishment costs of the fund (legal costs, advice costs) of about $2,000 were reported as a non-concessional contribution for Year 1.  

Unfortunately, the ATO - based upon the reported actual contributions and reported deemed contributions, assessed the member as having $152,000 non-concessional contributions for Year 1.  This meant that the “bring forward” was triggered in respect of Year 1 and not, as intended in Year 2.  The flow on effect was that of the $450,000 contributed in Year 2, $152,000 was assessed as being excess non-concessional contributions.

The point of the story is to either allow a margin for establishment costs or, alternatively, do not treat establishment costs as a deemed/notional contribution to the fund.

Using contribution clearing houses - A client’s employer used the services of a commercial clearing house  - that is a clearing house other than Medicare Australia, which is the only approved clearing house for the purposes of the Superannuation Guarantee (Administration) Act 1992.  The client’s strategy was to make a substantial contribution in Year 1 and a further substantial contribution in Year 2.  

The contribution was made to the commercial clearing house in late June.  Unfortunately, incomplete information was provided to the clearing house operator and the delay in obtaining the complete information meant that the operator of the clearing house did not on-forward the contribution to the relevant super fund until mid-July.  Consequently, for contribution cap purposes the contribution intended to be counted for Year 1 was in fact counted for Year 2.  The client was unaware of the delay in on-forwarding the contribution and proceeded to make, as intended, a large contribution for Year 2.  As both contributions were reported in Year 2, the client had exceeded the relevant cap.

The point of the story is that if your employer is using a contribution clearing house other than Medicare Australia, sufficient time must be allowed for the contribution to be processed by the clearing house.  For contribution cap purposes, the relevant time is not when the clearing house received the contribution, but when the intended super fund was paid the contribution by the clearing house.  

When CGT contributions are not CGT contributions - The strategy is to make CGT contributions up to the CGT contribution limit and then make non-concessional contributions.  Using this strategy, it is possible for an SMSF investor to transfer $1.655m of non-concessional contributions into the super system in a single year.  This assumes that the member has not previously accessed their CGT contribution limit and they are entitled to utilise the “bring forward” of contributions.

The problem is whether the non-concessional contributions claimed to be CGT contributions are, in fact, CGT contributions.  The ATO is likely to take a very close and keen interest in any entitlement to access the CGT small business concessions.

However, for the CGT concessional cap of $1.205m to apply, the contributions must in fact be CGT contributions.  Believing that they are CGT contributions – even when that belief is supported by external advice – is not sufficient: they must be CGT contributions.

Expert advice in this area is essential.  It is highly unlikely that the ATO will be inclined to exercise the discretion to disregard or reallocate excess contributions merely to rectify inadequate professional advice.

If the $1.205m of contributions were not in fact CGT contributions, this strategy will result in the SMSF investor having $1.205m of excess non-concessional contributions and a tax liability of about $560,000.