Taxpayers Win in Excess Contributions and Non-Compliance Notices – Yes, Virginia, there is a Father Christmas

25 July 2012

Two extraordinary decisions have recently been handed by the Administrative Appeals Tribunal (AAT).

In the first case a taxpayer successfully appealed against the Commissioner’s decision not to exercise his discretion to allocate a superannuation contribution to an earlier financial year.

The only conclusion to be drawn from these two cases – yes, there is Virginia, a Father Christmas.

As the AAT held the discretion should be exercised and in fact reallocated a contribution to the preceding financial year, the taxpayer ceased to have an excess contribution issue.

First Decision – Excess Contributions

Given that there have now been a number of AAT appeals involving the Commissioner’s decision not to exercise his discretion, this decision is out of kilter with those other decisions.

Background

The key facts are:

  • The taxpayer was the sole director and sole shareholder of the company;
  • The company intended to make superannuation contributions for the taxpayer;
  • The company had an established practice of making contributions in June for the taxpayer;
  • It seems that the contributions were made to a retail superannuation fund;
  • The taxpayer was travelling overseas between late June and early July 2007;
  • The taxpayer contacted his accountant as to whether the company needed to make the super contribution before 1 July 2007 or whether the contribution could be made on or before 28 July 2007;
  • There was no evidence as to whether the accountant responded to the enquiry or, if there was a response, the content of the response;
  • The taxpayer viewed the ATO website which on his reading confirmed that there was a 28 day grace period for contributions to be accepted in respect of the 2006/07 financial year;
  • The company made the contribution on 10 July 2007;
  • The company made a subsequent contribution in June 2008;
  • The two contributions exceeded the taxpayer’s concessional contribution cap; and
  • The taxpayer was duly issued with a notice of excess concessional contributions tax.


Assessment process

As a result of the issue of the notice of excess contributions tax the taxpayer requested that the ATO exercise its discretion to treat, for excess contributions tax purposes, the 10 July 2007 contribution as if it had been made during the 2006/07 financial year.  

The ATO declined the request and the matter was referred to the AAT.    


Reasoning of the AAT

The AAT approached the matter on the basis that the taxpayer had to first show that there were special circumstances and, if there were, whether the discretion should be exercised.

The taxpayer argued that the following matters established that there were special circumstances:

  • The taxpayer took advice from his accountant and his accountant did not alert him to the fact that the 28 day grace period only applied for the purposes of the SG levy.   Comment:  incorrect advice hardly constitutes special circumstances.  Further it is not clear from the AAT decision that sufficient evidence was adduced as to whether the taxpayer sought advice and, if so, what that advice was.
  • The taxpayer was misled by the ATO website – in that on his reading of the text it was not clear that the 28 day grace period did not apply for excess contribution tax purposes.   Comment:  The text on the ATO website was correct.  The text only discussed the 28 day grace period in relation to SG issues.  This hardly constitutes special circumstances.
  • The Taxpayer argued that he was denied the opportunity to correct the error (by adjusting the June 2008 contribution) as the ATO failed to notify him of the issue in a timely manner.  Further, the trustee of the super fund confirmed that the 10 July 2007 contribution was allocated to the 2006/07 financial year. Comment: It is not the role of the ATO to keep a watching brief on potentially excess contributions.  The ATO would only have been aware of the June 2008 contribution post 30 June 2008.  The content of the trustee correspondence is not noted in the decision.  Presumably, the trustee was advising that the 10 July 2007 contribution was made in time for the contribution to be counted toward the employer’s 2006/07 SG obligation.  These matters hardly justify special circumstances.

The AAT was “..satisfied that, taken together, these matters are enough to constitute special circumstances.  While I would not ordinarily accept a mere misunderstanding of one’s obligations is enough to constitute special circumstances, there was what might be described as a “perfect storm” of events, miscommunications and misunderstandings that combined to leave the taxpayer in an unusual and unfortunate position...”.  Paragraph 12.

The AAT, having determined that special circumstances existed, then considered whether the discretion to reallocate the July 2007 contribution should be exercised.

The AAT held that the discretion should be exercised as there was an established practice of the company making contributions in June.

Concluding Comments

It is surprising that the AAT did not refer to the ATO’s practice statement PS LA 2008/1 as to when the discretion to disregard or reallocate contributions will be exercised.

It is also surprising that there was only one AAT decision cited: Chantrell v FCT [2012] AATA 179.  

Finally it is surprising that the grounds advanced by the taxpayer were accepted as constituting special circumstances.  Taken individually or collectively, the advanced grounds are not convincing.  Possibly this is one matter which the ATO may take on appeal.

Case details are Bornstein v Commissioner of Taxation [2012] AATA 424.

Second Decision – Notice of Non-Compliance – set aside

The second case involved the issue of a notice of non-compliance in respect of a superannuation fund.  The trustees of the superannuation fund had, in effect, used the superannuation fund as a lender of last resort when loan finance was required to support the principal’s business.

Sometimes the loans were properly documented, sometimes interest was paid.

The ATO became aware of the loans by means of an auditor contravention report.  Following an investigation of the fund and its lending practices, the ATO advised that if the trustees offered an enforceable undertaking to repay the loans with interest by an agreed date, the ATO would not issue a notice of non-compliance in respect of the fund.

The taxpayers duly offered to the ATO an enforceable undertaking which was legally documented and which specified a last chance repayment date for the loans and interest.  

The taxpayers were unable to sell certain assets and thereby did not meet the last chance repayment date.  The taxpayers declined to conduct a fire sale of the assets and therefore breached the enforceable undertaking.  Further the taxpayers, even after failing to satisfy the due date for repayment, did not repay loans at the first opportunity after the due date but instead applied sale proceeds to purchase a residential property.  Only later when further sale proceeds became available did they repay the loans due to the fund.

In light of the breach of the enforceable undertaking the Commissioner duly issued a notice of non-compliance for the fund.

The taxpayers objected to the decision to issue the notice of non-compliance and, after the ATO, affirmed its decision to issue the notice of non-compliance, the taxpayers referred the matter to the AAT.

The AAT held, after due consideration of the taxpayers and the Commissioner’s arguments, that the discretion to issue a notice of non-compliance should not be issued.

The AAT concluded that “This case is finely balanced.  The contraventions were serious and Mr and Mrs Pabian failed to discharge their duties to rectify the breach in a timely manner.  Against this, Mr and Mrs Pabian caused Pabian Park (the borrower) to repay the Fund, albeit later than promised, and the tax consequences on the Fund, and hence their retirement savings were significant.  At the heart of the case is Mr and Mrs Pabian’s apparent failure to appreciate the seriousness of the issue after they were notified of the breach but more particularly after they executed an enforceable undertaking, with which they did not comply.  .....There is no history of non-compliance, which is significant given they managed the Fund without incident for approximately 12 years, and there is evidence ....that the Fund was made compliant in June 2012.  There is no evidence that the Fund has breached any regulatory provisions since this time.” Paragraph 74 and 75.    Comment: Again, this is a surprising outcome given the taxpayers failed to comply with the terms of the enforceable undertaking.  Further, the taxpayers did not repay the borrowing from the superannuation fund when the first opportunity to do so arose.

Case details are Pabian Park Pty Ltd Superannuation Benefits Fund v Commissioner of Taxation  [2012] AATA 375.

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