The ATO released a draft Law Administration Practice Statement on 15 December 2021, PSLA 2021/D3: Superannuation – Commissioner’s discretion where members receive benefits in breach of legislative requirements, on circumstances where the Commissioner can apply discretion in subsection 304-10(4) of the ITAA 1997 where a member receives superannuation benefits in breach of legislative requirements.
Where the Commissioner exercises the discretion, the super benefit will not form part of the person’s assessable income, but will instead be taxed as a super benefit – this is in line with draft Tax Determination TD 2021/D6, Income tax: tax treatment of a superannuation benefit when the Commissioner exercises the discretion in subsection 304-10(4) of the Income Tax Assessment Act 1997.
Where a payment is made from a super fund in breach of the payment standards (such as before meeting a condition of release with a nil cashing condition – e.g. retirement), the Commissioner can apply his discretion under Division 304 to not include the amount in a member’s assessable income if he is satisfied that this would be unreasonable having regards to the matters in subsection 304-10(4).
A super benefit that is received from a complying super fund otherwise than in accordance with the payment standards prescribed under subsection 31(1) of the SIS Act is included in an individual’s assessable income under subsection 304-10(1). This treatment applies despite the application of Divisions 301, 302 and 303 (relating to the payment of super and super death benefits).
However, an individual does not need to include an amount in their assessable income under section 304-10 to the extent the Commissioner is satisfied that this would be unreasonable having regard to the matters in subsection 304-10(4). In such circumstances, the tax treatment would refer back to that set out for a super benefit or super death benefit, based upon the taxpayer’s own circumstances (e.g. age, tax dependency, etc).
To understand the implications of this determination, let’s take a look at the following example:
Example – overpayment of transition to retirement income stream
Donald is aged 58 and is a member of Muscovy Superannuation Fund. Muscovy Superannuation Fund is a complying superannuation fund regulated by the Australian Prudential Regulation Authority (APRA).
On 1 July 2020, Donald commenced a transition to a retirement pension which had a maximum amount of $75,000 that could be paid annually. He asked the superannuation fund to make the maximum pension payment to his bank account in June each year.
In June 2021, the superannuation fund overpays Donald’s pension by $10,000 because of a system error.
Because Donald had passed his preservation age, but not met any of the other conditions of release during the financial year, he was allowed only the cashing of benefits in the form of a transition to retirement income stream. The $85,000 benefit did not satisfy the cashing restriction contained in table item 110 of Schedule 1 to the Superannuation Industry (Supervision) Regulations 1994. Donald received the payment in breach of the payment standards prescribed under subsection 31(1) of the SISA.
As a result of this breach, the superannuation benefit is included in Donald’s assessable income and not taxed concessionally under Division 301, unless the Commissioner exercises the discretion in subsection 304-10(4).
However, because the benefit was received as the result of an error by a complying APRA-regulated superannuation fund, the Commissioner is satisfied that it would be unreasonable to include the $85,000 payment in Donald’s assessable income under section 304-10. As the benefit was received by Donald due to his membership of the fund, and the conditions in Division 303 did not apply, the superannuation benefit of $85,000 is taxed under Division 301.
Will this discretion apply to SMSFs?
It depends… the Practice Statement indicates that the Commissioner’s discretion in subsection 304-10(4) should generally be exercised where:
- There are no tax avoidance implications, and
- ‘The excessive benefit arose fortuitously or in other circumstances beyond the effective control of the recipient or the employer’
In exercising discretion, subsection 304-10(4) requires consideration of:
- The nature of the fund that the super benefit is paid from – different weighting may likely be given to particular factors depending on whether it was paid from a SMSF or APRA regulated fund; and
- Any other matters the Commissioner considers relevant.
The ATO has provided the following factors that may support or not support the Commissioner exercising discretion favourably:
|Factors that may support exercising the discretion favourably||Factors that may not provide support for exercising the discretion favourably|
If a super benefit has been accessed under an illegal early release (IER) scheme, the ATO would generally not exercise the discretion. This is the case even where the person loses the benefit of the funds due to fraudulent activity committed by another person (for example, the promoter of the scheme) after it has been released.
In addition to these factors, the ATO may consider any other factors present when the amount was paid, but give little weight to anything that occurs after that time. This includes factors that are unforeseen, or that are outside the person’s control, such as a significant global financial downturn.
Effective control and the nature of the fund
In the context of an SMSF, it is expected that all trustees/directors will be aware of all the relevant requirements of the SISA and the SISR pertaining to the payment of benefits, including:
- whether a member has met a condition of release
- any cashing conditions attached to a particular condition of release
- annual amounts required to be paid from a super income stream, including any limits on the annual amount that may be paid
- restrictions as to the commutation of various pension types, and
- obligations with respect to release authorities.
It is in this context, the exercise of the Commissioner’s discretion must consider whether circumstances are genuinely beyond the ‘effective control’ of the recipient of the benefit where the benefit is paid from an SMSF.
An example of a benefit received genuinely beyond the recipient’s effective control would be where the member is in receipt of a transition to retirement income stream and a transposition error by the SMSF’s bank in responding to a request for payment leads to an amount in excess of the 10% annual limit being inadvertently paid. This is in contrast to an APRA regulated fund that distinguishes between the trustee/member relationship regarding the operation and administration of the fund.
Attempted rectification of the transaction
A member’s attempt to rectify a transaction by paying an amount equal to the super benefit to the super fund, immediately or shortly after receiving the benefit, is generally a factor that would be given little or no weight when considering whether the Commissioner should exercise his discretion. This includes where the payment is properly recorded as a concessional or non-concessional contribution.
The payment of monies to a fund after an amount has been paid from the fund can have no effect on whether or not that amount was paid in breach of the SISA/SISR requirements. In particular, the payment to the fund does not unwind the original payment from the fund. Whether the discretion should be exercised should be based on considerations directly related to the payment itself.
Very little wriggle room
The ATO’s preliminary views clearly put a significant focus on SMSFs to ensure strict compliance with the payment standards, with very little wriggle room in situations where SMSF trustees/members get in wrong.