Excess super contributions: Taxpayers still can’t get a win

I don’t want to keep harping on about the excess super contributions tax issue, but so far this year, taxpayers are batting zero in excess tax cases that have come before the Administrative Appeals Tribunal.

The excess contributions tax issue continues to be a problem.

While some cases might be settled before they reach the AAT or the courts (and some in favour of taxpayers it must be said), decisions on these cases handed down by the AAT this year have all gone the way of the Tax Commissioner.

In the latest case, the AAT affirmed the Commissioner’s decision to impose an excess contributions tax assessment and deny a taxpayer’s request for excess contributions amounts to be reallocated to a previous financial year pursuant to the law.

In this case, on June 30, 2007, the taxpayer attempted to transfer $60,000 from a family discretionary trust into his self-managed super fund (SMSF). The transfer was a concessional contribution and the taxpayer intended that $40,000 be allocated to himself and $20,000 to his spouse. However, because June 30 was a Saturday, the amount was not credited via his bank to the super fund until July 2.

The excess concessional contributions for the 2008 financial year amounted to almost $54,000 and the Commissioner imposed excess contributions tax of around $17,000. The taxpayer requested that the $40,000 amount be reallocated to the previous year.

The taxpayer submitted that it was reasonable for him to have expected that the transfer of funds would have been instantaneous. He contended that the transaction had been recognised by the bank as having been effected on June 30, even if the withdrawal and deposit of funds had not taken place until July 2 (as shown in bank records).

He also argued that had the transfer been on a business day, it would have been effective virtually instantaneously. The taxpayer also claimed that a reallocation of his $40,000 contribution would be consistent with the object of the law to encourage individuals to make contributions “gradually over the course of the person’s life”.

Although the Tribunal said the taxpayer appeared “to have acted with good intentions at all times”, it found the circumstances did not warrant the discretion being exercised to reallocate the amounts.

The Tribunal said that in relation to electronic funds transfers to a superannuation provider, the Commissioner’s practice is to deem the contribution as having been made when the funds are credited to the superannuation provider’s account. It found the funds were not credited to the super fund’s account until July 2, 2007.

The AAT found that “special circumstances” did not exist in this instance. If it had found that special circumstances existed, the reallocation could have been allowed.

The Tribunal said the taxpayer “chose to trust the technology or, more specifically, to speculate as to the effectiveness of the manner in which he was anticipating that the technology would operate”. It added that every other taxpayer was faced with the same situation. The AAT considered it was incumbent upon the taxpayer to ensure that the transfer was effective.

The Tribunal was not of the view that the imposition of excess contributions tax in the circumstances was unjust, unreasonable or inappropriate. It therefore found there were no grounds for the Commissioner to make a determination to disregard or reallocate the subject amount to the 2007 financial year.

As I said at the outset, taxpayers are batting zero in their fight against excess super contributions tax assessments. The law provides the Tax Commissioner with a very narrow discretion to find in favour of taxpayers, and he appears to be interpreting the law very strictly. Amendments have been introduced to give eligible individuals a once-only option to effectively be refunded their excess concessional contributions up to $10,000 but only from July 1, 2011.

This will not help anyone with an excess contribution problem before that date, and will arguably not satisfactorily solve the problem anyway. And the compliance aspects of the “$10,000 solution” are proving to be a nightmare. The Federal Government’s Superannuation Roundtable is looking at the issue, but there is no word yet on where this is heading.

Many of the cases that have come up are not avoidance cases. Many excess contributions are because of genuine mistakes, but the law applying before July 1, 2011 does not adequately deal with this.

The excess super contributions tax (ECT) laws were originally introduced as an equity measure to restrict the accumulation of excessive benefits in a concessionally-taxed environment. So, caps or limits on concessional super contributions were set. In this respect, the ECT provisions were designed to “neutralise” the concessional tax treatment of contributions above the caps.

Under the caps, it doesn’t matter how much you already have in super, but a restriction was placed on moving new money into super.

These caps or limits on concessional super contributions were championed by the then government as a “simplification” of the super system, which enabled the abolition of the former dreaded reasonable benefit limits (RBLs). Despite these good intentions, constant tinkering with the provisions over the past five years has transformed the ECT regime into a complex beast that rivals the former RBL provisions for anomalies and traps.

The amount of these caps has also become a controversial issue with the planned reduction in the concessional contributions cap to $25,000 from July 1, 2012 for those over age 50 with at least $500,000 already in super. It is claimed that $25,000 is far too low a cap. Suggestions have been made to increase the $25,000 cap to $35,000.

The $25,000 cap can produce some absurd results. Take, for example, the situation of a company that has a policy of topping up the compulsory 9% super it pays for selected employees to help them lift their super balances as a way of retaining valuable employees. The effect of the 9% plus top-up could mean the $25,000 cap is exceeded thereby giving rise to an ECT penalty. This is potentially absurd. To avoid the ECT penalty, the company would have to reduce superannuation contributions for affected employees. Is there a case for excluding the 9% compulsory super from the concessional cap? Without any change, the problem will only be exacerbated by the phased increase of the compulsory 9% super to 12%.

Take another example. People who may have directorships at more than one company could potentially be forced to pay the ECT penalty tax simply by application of the law. That is, the compulsory 9% super by law, applied across those directorships, could by itself mean they exceed the $25,000 cap and hence incur the penalty. Admittedly, this is at the higher end of the income scale, but the principle is applicable.

Superannuation does operate in a concessionally taxed environment, but the rationale for that is to encourage people to put money into super.

However, the net result of the caps and the excess contributions tax laws seems to be that the Government is effectively reducing people’s superannuation by the application of laws that apply a one-size-fits-all approach.

Seems to be some mixed messages coming out of Canberra concerning super. Encourage people to put money into super, but penalise them if they put in “too much”.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.