Unintended Consequences - The tax concessions Caesar grants can also be taxed by Caesar!

A recent case, the MTBW Case has highlighted the interaction between the carry forward of unused concessional contributions cap space and the claw back of the tax concession for superannuation contributions in respect of high income earners by Division 293. The case clearly illustrates what (tax concessions) Caesar gives, Caesar can also take back.

Factual Background

In respect of the 2022 financial year, the Taxpayer was assessed as having income for Division 293 purposes of $272,100 (including concessional contributions of $82,482). Consequently, the Taxpayer was liable for Division 293 Tax on the Taxpayer’s “taxable contribution amount”. The taxable contribution amount is that portion of the Taxpayer’s Division 293 income which exceeds $250,000 (assuming the taxable contribution amount is the top slice of the Division 293 income) which was, for the Taxpayer, $22,100 ($272,100 less $250,000). This resulted in a Division 293 tax liability of $3,315 being 15% of the $22,100 excess.

While the standard concessional contribution cap for the 2022 financial year was $27,500, the Taxpayer had a personal concessional contribution cap of $82,482 as the Taxpayer had unused concessional contribution cap space (“Unused Cap Space”) of $54,982 carried forward from previous financial years.

The curious aspect of the case is that for the Taxpayer to apply the Unused Cap Space to the 2022 financial year, the Taxpayer must have had a total superannuation balance as at 30 June 2021 of less than $500,000. However, the Taxpayer’s total superannuation balance (ignoring investment earnings) would at the end of the 2022 income year have been less than $600,000. Division 293 was introduced to claw back a portion of the tax concession in respect of concessional contributions of “high income earners”. In this case, the Taxpayer has only become a high income earner for the 2022 financial year by reason of the application of the Taxpayer’s Unused Cap Space and the Taxpayer could only apply the Unused Cap Space by having, for high income earners, a relatively modest total superannuation balance.

Carry forward of Unused Cap Space

Since the 2019 financial year, if a taxpayer’s concessional contributions amount (even nil amount) for a financial year is less than the standard concessional contributions cap for that year, the unused portion of the cap can be carried forward to the next financial year. Consequently, the concessional contribution cap for the taxpayer for the following year will be the standard cap for that year increased by the unused cap for the previous year.

There are two significant limits to the carry forward of unused cap space. The first is that unused cap space can only be applied in a financial year if the taxpayer’s concessional contributions amount for the financial year exceeds the standard cap for that year. The second is that unused cap space must be applied in the order in which they arose and they cannot be carried forward for more than five financial years.

Division 293 Tax

Division 293 Tax applies when a taxpayer’s Division 293 income for a financial year exceeds $250,000. The tax is imposed on the individual. The individual may pay the assessed tax personally or may arrange for their superannuation balance to be released for this purpose (with resulting deduction in their superannuation balance).

In board terms, the Division 293 income of a taxpayer for a financial year is the aggregate of a taxpayer’s taxable income, their reportable fringe benefits total; their concessional contributions and their total net investment loss.

The Division 293 tax is calculated as 15% of that portion of the Division 293 income which exceeds $250,000 (but the tax is capped at 15% of the concessional contributions for that year).

Taxpayer’s Argument against the Division 293 tax assessment

The Taxpayer argued that the carry forward of the Unused Cap Space only applied at the Taxpayer’s election and that no such election had been made. If this argument was accepted then the Taxpayer’s income for the 2022 financial year for Division 293 purposes would fall under the $250,000 threshold thereby not triggering the application of Division 293.

This argument was supported by the wording of text on the Website of the ATO relating to the carry forward of Unused Cap Space, where the text states that “you can use the caps” as suggesting the application of the higher concessional contribution cap (being the normal cap increased by the carry forward of Unused Cap Space) is at the election of the taxpayer and not mandatory.

Additionally, the Taxpayer argued that this election interpretation was supported by the text of the guide to Division 291 (which is the division of the Income Tax Assessment Act 1997 dealing with deductions for superannuation contributions) which states “You (the taxpayer) can carry forward unused concessional contributions cap from the previous 5 financial years..”

Tribunal’s Decision

While the Tribunal found the website text and the guide, when read in isolation, is consistent with the Taxpayers’ argument, neither the text nor the statutory guide could override the plain meaning of the statutory provisions.

The plain meaning of the statutory provisions was that if a taxpayer has Unused Cap Space from one of the previous 5 financial years, the Unused Cap Space is automatically carried forward and the taxpayer has no election in the matter. In short, there is no election. The consequence of which was that the Division 292 tax assessment was valid.

Where there other arguments that the taxpayer could have used?

Could the taxpayer argue that for the purposes of Division 293 only concessional contributions within the standard (which was $27,500 for 2021/22 income year)?

Unfortunately, this argument simply has no support in the text of Division 293.

Could the taxpayer argue that the concessional contributions, in the excess of the standard concessional contribution cap, are “excess contributions” and are not counted for Division 293 purposes?

Again, this argument has no support in the text of either Division 291 or Division 293. Where Unused Cap Space is carried forward, the amount of excess concessional contributions is determined by the concessional contributions cap (adjusted by the carried forward Unused Cap Space).

Could the taxpayer argue that discretion conferred on the Commissioner of Taxation (under s291-465) could be exercised and the Commissioner disregard or reallocate all or part of the concessional contributions to another income year?

This argument fails as the precondition for the discretion to be exercised by the Commissioner is that the Taxpayer has excess non-concessional contributions. The Taxpayer did not have excess concessional contributions – as they were all within the actual concessional contribution cap applying to the Taxpayer.

Could the tax deduction for the contributions be reduced so that the concessions (or part of them were not concessional)?

The contributions were made by the employer of the Taxpayer (of whom the Taxpayer was a director). As employer contributions, they are fully tax deductible and there is no means to reduce the amount of the contributions which will be claimed as a tax deduction (unlike personal contributions – in relation to which the Taxpayer could elect to reduce the deduction to be claimed for the contributions).

Could the trustee classify the contributions to the extent to which they exceed the standard cap as being non-concessional contributions?

Such a power of classification is not open to the trustee. Employer contributions are necessarily “assessable contributions” of a superannuation fund and so will be “concessional contributions” by reason of section 291-25(2)(b). The trustee has no discretion in the matter.

Could the Taxpayer argue that the contributions were made under a mistake as to the taxation consequences which would arise by making the contributions and therefore the contributions could be set aside?

No as only a Court can set aside a transaction on the basis of an operative mistake and there was no Court Order. In any event, the proper litigant would have been the employer rather than the Taxpayer. It would be difficult for the employer (even if so minded) to argue that there was any operative mistake as any contribution made by the employer would be a deductible contribution and therefore a concessional contribution. In any event, the financial harm suffered by the Taxpayer (being an assessment of Division 293 tax of $3,315) is vastly disproportionate to the costs of any legal proceedings to make such a decision to commence proceedings irrational.

Conclusion

It is striking that the Taxpayer was only liable for Division 293 tax (a tax intended to reduce the tax benefit of deductible superannuation contributions for high income earners) by reason only of the additional concessional contributions) and in order have additional concessional contributions, the Taxpayer had to have a total superannuation balance of less than $500,000 which is not consistent with the Taxpayer being a high income earner.

Should Division 293 be amended to disregard effect of the carry forward of Unused Cap Space when determining whether the Division 293 threshold of $250,000 has been reached? Yes. And such an amendment would be more consistent with the policy purposes of Division 293.

WTBW v Commissioner of Taxation [2024] AATA 3268