Inconvenient Super Contributions

One of the key elements of the current super regime is the contribution caps.  The integrity of the current system depends on the proper enforcement of these caps.  While the recent reduction in the concessional cap was a shorted-sighted government policy (which hopefully will be reversed), the caps are with us.

Given that the caps are part of the current super regime, the only response is to ensure that they are not breached.  Prevention is much the better response.

Once the caps are breached (and the ATO will determine if and by how much they are breached) there are very few remedies available.

Generally, self help remedies will not be effective to solve the problem of an inconvenient excess contribution.  There are three main types of self help remedies:  claiming the contribution was never made, reversing the contribution, and correcting the contribution report.

Contribution Never Made

The first type of self-help is to claim that the contribution was never made.  The argument is that the inconvenient contribution, despite appearances, was never made to the super fund because the contribution was in fact made to a separate and distinct trust – called an excessive contributions trust – and not to the trust fund of the superannuation fund.

The ATO has issued a Tax Payer Alert (TA 2010/2) on 29 March 2010 which considers the effectiveness of the “excess contributions trust”.  This is an arrangement by which a contribution which is subsequently determined to be excessive is, by force of a provision within the governing rules of the superannuation fund, suddenly held by the trustee not as part of the trust fund of the superannuation fund but on a separate and distinct trust.  The argument being that the contribution was never made to the superannuation fund but to another non superannuation entity.  On this basis, the inconvenient contribution is retrospectively treated as never being held by the trustee as a contribution for the superannuation fund.

While the motivation is understood – in the worst possible case an excess contribution could bear a combined tax equal to 93% of the face value of the contribution – the excess contributions trust was not going to solve the problem.  First and foremost, the inconvenient contribution was in fact accepted by the trustee and formed part of the trust fund of the super fund possibly for 12 to 18 months.  SUPERCentral’s lawyers were of the view that such arrangements were for both taxation and trust law reasons not effective.

Reversing the Contribution

The second type of self-help is for the trustee to repay the inconvenient contribution.  The repayment may occur once the taxpayer and their advisers realise that there is an excessive contributions problem.  This realisation may be stimulated by the receipt of an ATO letter warning that the ATO has identified an excess contribution in respect of the member.

While there is a legal doctrine which deals with payments and transfers of property which were made by mistake, unfortunately this doctrine does require that there be a real mistake.  For example, the member intending to contribute $25,000 but by error contributed $250,000; or the member thought the $250,000 contribution was made to a private family trust when it fact it was made to the super fund.

Also, for the doctrine to apply, the mistake must be as to some aspect of the transaction (ie incorrect amount or incorrect recipient) and not to a consequence of the transaction.

The ATO has recently issued Interpretative Decision 2010/104 which deals with the issue of mistaken contributions.  In short, unless the circumstances of the contribution are such as would satisfy a Court to grant a declaration that the contribution was made under a mistake, the ATO is not likely to accept the assertion.

Correcting the Contribution Advice

The third self-help remedy for inconvenient contributions is to adopt the approach that the first reporting of the contribution was mistaken in some respect.  The contribution is said to be a contribution for another member or part contribution and part asset purchase.  Alternatively, the contribution was received in an earlier or later financial year.  Certainly, if there has been a genuine error in the reporting of the contribution to the ATO then the incorrect reporting must be corrected.  However, it seems likely that the ATO will be closely scrutinising claims of corrected information.  A taxpayer who intentionally or recklessly makes a false statement in relation to a taxation matter (such as superannuation contributions reporting) could be subject to civil or criminal penalties.

Government Assistance?

Finally, there is the self-help that the Government will solve the problem by increasing the contributions caps or allowing such inconvenient contributions to be refunded on a one-off amnesty.  So far there is no firm indication that the Government will play fairy godmother.  Having said that, the Government has adopted such a role in relation to banks and other deposit taking entities.