Following the introduction of the more limited superannuation contribution caps from 1 July 2009 (concessional contribution cap for members under 50 years – $25,000; and for members over 50 years – $50,000, reducing to $25,000 as from 1 July 2012), members of superannuation funds may have a liability to pay an additional tax (“excess contributions tax”) on contributions exceeding the contribution caps.
Excess non-concessional contributions are taxed at 46.5%, while excess concessional contributions are taxed at 31.5% (on top of the usual 15% tax). Sometimes, this problem is exacerbated because excess concessional contributions automatically count as non‑concessional contributions and can push a member into excess concessional and excess non-concessional territory. In this event, a marginal tax rate of 93% effectively applies.
In practice, excess non-concessional contributions can cause more problems than excess concessional contributions. The Superannuation Industry (Supervision) Regulations 1994 (“Regulations”) impose some obligations on trustees to return excess non-concessional contributions to members. However, the Australian Taxation Office (“ATO”) has interpreted these Regulations narrowly and this has severely limited a trustee’s ability to return excess contributions.
Specifically, Regulation 7.04(4) broadly requires a trustee to return contributions that are received above a person’s non-concessional contributions cap. However, the ATO has stated their view in ID 2007/225 that members must make a contribution that in itself exceeds their non‑concessional contributions cap in order for Regulation 7.04(4) to apply.
The ATO has stated that a trustee is not required to aggregate the total of all contributions received from a member in a financial year, but only on a contributionby-contribution basis. While there are arguments that this interpretation of Regulation 7.04(4) is incorrect, the ATO is likely to follow its view in ID 2007/225.
When can Excess Contribution problems arise?
Excess contribution problems can arise where, for example:
- members neglect to track their super contributions in a financial year;
- concessional contributions come from various sources (e.g. salary sacrifice contributions and mandated contributions from different employers);
- salary sacrifice arrangements are not reviewed since contribution caps have been halved; or
- a pay rise or bonus is received during the year which increases super contributions to a level beyond the concessional cap.
ATO Discretion
If excess contributions do arise a member may, under Division 292 (section 292- 465) of the Income Tax Assessment Act 1997, apply to the ATO for a determination that, for the purposes of excess contributions tax, all or part of the member’s excess concessional contributions or excess non-concessional contributions for a financial year are to be disregarded or allocated instead to another financial year specified in the determination.
Under section 292-465, the ATO may only exercise the discretion and make a determination in cases where it considers that:
- there are “special circumstances”; and
- making the determination is consistent with the object of Division 292, i.e. to ensure that the amount of concessionally taxed superannuation benefits that a member receives results from superannuation contributions that have been made gradually over the course of the member’s life.
The ATO has, in PS LA 2008/1, set out its views of when it will exercise the discretion in section 292-465. The discretion will generally not be exercised when based upon any of the following factors in isolation:
- financial hardship;
- ignorance of the law;
- incorrect professional advice; or
- retrospectivity of the law or the adverse effect of legislative changes.
PS LA 2008/1 also refers to examples that provide guidance on how the discretion might be exercised. The examples indicate that the circumstances that are likely to be considered special are more likely to arise where the member for whom the contribution is made has no control over the timing or the amount of the contribution, and the imposition of the tax would be unfair or unreasonable. In particular:
- •where superannuation guarantee contributions are made by a previous employer, causing a cap to be breached, and it is more appropriate that such contributions be allocated to another financial year;
- where it is not reasonably foreseeable that a bonus will be paid and a cap may be exceeded;
- where the member contributes to their fund prior to the end of the financial year, but the fund takes time to process the contribution and it is not processed until the following financial year whereupon a contribution cap is breached; or
- where a member has a salary sacrifice arrangement with their employer under which they do not intend to sacrifice more than the cap in any financial year, but the timing of contributions by the employer causes them to breach a cap in a particular financial year.
What are “special circumstances”?
The meaning of the expression “special circumstances” has been considered in numerous non-tax Court and Tribunal cases. The principles that emerge from these cases are that:
- it is not possible to lay down precise rules on what constitutes special circumstances; and
- the essence of special circumstances is that there is something unusual to take the member’s case, involving the making of excess contributions, outside the ordinary course.
The concept of “special circumstances” was analysed by the Administrative Appeals Tribunal (“AAT”) in McMennemin and Commissioner of Taxation [2010] AATA 573 and, on appeal, by the Full Federal Court in Commissioner of Taxation v Administrative Appeals Tribunal [2011] FCAFC 37. In McMennemin, the AAT commented that a misunderstanding or an incomplete understanding of the law did not amount to special circumstances that would warrant the exercise of the ATO’s discretion. This view was confirmed by the Full Federal Court. In doing so, the Court effectively ruled that the AAT does not have the power to review the imposition of excess contributions tax imposed in assessments raised before November 2010. However, as a result of changes made to section 292-465, where excess contributions tax assessments are raised after November 2010, it is still possible for members to apply to the AAT to appeal against the imposition of excess contributions tax and the failure of the ATO to exercise the discretion. In these circumstances, for an appeal to be successful, special circumstances must be shown.
How best to avoid excess contributions tax?
Given the state of the legislation, the best way to avoid the tax is for members to be pro-active, on an ongoing basis, to ensure that excess contributions are not made to their super. To do this, members must continually monitor the various sources, or potential sources, of superannuation contributions to their fund.
In the unlikely event that excess contributions do arise, legal advice should be sought on whether a special circumstances argument exists and whether a section 292-465 discretion might be available.
