Tax is based on what actually occurs – not what should have occurred

The AAT has recently heard a case where a taxpayer was issued with a substantial excess contributions tax assessment.  During the May 2006 to 30 June 2007 transitional period leading into the current super regime, the taxpayer contributed about $1.5m as non-concessional contributions.  The taxpayer’s intention was that this contribution would be shared between himself and another person.

Unfortunately at the time the contribution was made, the taxpayer was the only member of the fund.  The taxpayer claimed that he had made the contribution on the basis that the other person had previously been admitted to the fund.

The AAT held that, even accepting the taxpayer’s intention, at the time the contribution was made there was only one member of the fund and the contribution therefore had to be allocated to that member.

The AAT noted that “The taxpayer’s liability for taxation cannot be judged on the basis of what he should have done; he is liable on the basis of what he (or his agent, which is effectively the same thing at law) actually did do.”  The quote might be embellished to say – the taxpayer is taxed on what he did and not on the basis of what he thought he did, wished he had done or told someone else to do.

Clearly this decision shows the importance of paperwork for SMSFs.  If you wish to make a contribution to an SMSF, ensure that the person for whom the contribution is to be made, is already a member of the fund.

The decision also raises the interesting hypothetical: if the other person had been admitted as a member after the contribution was made to the fund, but before the contribution was allocated using the 28 day rule, would the ATO accept that the contribution could be treated for contribution cap purposes as being allocated to the other person?

Tax Ruling 2010/1 which deals with contributions has touched upon this issue in the context of an employer making bulk contributions to a fund for its employees, including employees who are not yet members, but will become members in due course.

While an argument could be made that the critical issue is whether the person is a member at the time the contribution is allocated, a safer course of action would be to ensure that the person has been admitted as a member before the contribution is made.

The case reference is The Taxpayer v The Commissioner of Taxation [2011] AATA 168