Excessive Contributions - The Dowling Matter reheard

The Dowling excess contributions case has now been reheard by the Administrative Appeals Tribunal.  This was the second appearance of Mrs Dowling before the Tribunal.  In the first appearance she was successful and the Tribunal held that there were special circumstances which warranted the ATO exercising the discretion to disregard her excess contributions.  However, the ATO appealed that decision to the Federal Court and the Federal Court upheld the appeal and sent the matter back to the Tribunal to be reconsidered in accordance with the directions of the Court.

The Tribunal has now reheard the matter and found that there were no special circumstances and therefore that the ATO was not permitted to exercise its discretion to disregard the excess contributions of Mrs Dowling.

By way of background – the Dowling's undertook a Centrelink switcheroo.  Mr Dowling withdrew his super as a lump sum – which was tax free in his hands as he had retired and was aged more than 60 - and gifted the lump sum to Mrs Dowling, who then contributed the gifted amount as a non-concessional contribution for her.  Given the amount involved, Mrs Dowling triggered the “bring forward” of non-concessional contributions.  As a result of this transaction, Mr Dowling had very materially reduced his Centrelink counted assets and thereby qualified for the pension.  Mrs Dowling had materially increased her superannuation balance and, as she was under age 65, the triggering of the “bring forward” did not immediately affect her.  While the Dowling's took advice as to the switching transaction and its Centrelink and superannuation consequences, they seemed not to have been advised as to the consequences of the transaction for contributions made in later years.

In the third year of the bring forward period, Mrs Dowling undertook a re-contribution strategy to improve the tax free portion of her superannuation benefits.  The re-contribution meant that she exceeded the “bring forward limit” resulting in a $20,000 excess contributions tax.  There was no suggestion that the re-contribution strategy was suspect or defective.  However, the re-contribution strategy when combined with the previous triggering of the “bring forward” limit resulted in her having excessive non-concessional contributions of about $40,000. 

Mrs Dowling appealed to the Tribunal on the ground that the ATO should have exercised the discretion to disregard the excess contribution – as it was, in effect, double counting the contribution for cap purposes.   In the first hearing, she was successful and the Tribunal held that there were special circumstances and that the ATO should exercise the discretion to disregard or to reallocate the excess non-concessional contributions. 

The ATO appealed to the Federal Court which upheld the appeal and remitted the matter back to the Tribunal for reconsideration in light of the Court’s reasoning and the rest is history.  On rehearing the matter, the Tribunal held that there were no special circumstances and that therefore the ATO had no authority to re-allocate or to disregard the excess contributions.

The Government has previously addressed the problem of excess concessional contributions by introducing a system by which excess concessional contributions are allocated to the member and taxed in the member’s hands at their marginal tax rates (with a due allowance for the tax paid in the fund).  The Government has announced (in the May 2014 Budget) that it will introduce a similar system for excess non-concessional contributions, which scheme will apply to excess non-concessional contributions which arise in respect of the 2013/14 and following financial years. 

With the second decision in the Dowling matter the ATO has obtained a significant legal victory.  The requirement of “special circumstances” is a very significant hurdle and most taxpayers have not been able to jump this hurdle.