A common question we get asked is how to deal with contributions that have mistakenly resulted in a client exceeding their contribution cap. The changes to the contribution rules from 1 July 2017, both in terms of contribution caps, but also the introduction of a total superannuation balance concept have highlighted the importance of getting the management of contributions correct. Whilst the days of significant penalty taxes on excess amounts are effectively gone, now replaced with a refundable mechanism for both concessional and non-concessional contributions, it is important to remember that contributions generally cannot just be returned to a member because:
- they regret making the contribution
- they or their agents made an error in their decision to contribute.
Contributions may only be refunded in very limited circumstances prescribed by legislation. Getting it wrong can potentially lead to the fund become non-complying.
If you would like to purchase the Smarter SMSF Tax Planning checklist, you can purchase it here.
So, how does it work?
A trustee can only return a contribution that it receives on behalf of a member:
- where it was unable to have been accepted under the SIS Act or SISR; or
- if the return is authorised by the principles of restitution for mistake.
Contributions that a fund must not accept
Very limited circumstances exist from 1 July 2017 as to contributions that cannot be accepted by a fund trustee. SISR 7.04 set out the restrictions by age for whom the contribution is made (e.g. individual over 65 years of age must have satisfied a ‘work test’ before the contribution is made for the contribution is accepted). A contribution must also be returned where a valid TFN has not been provided.
[NB. The fund-capped contribution limit rules were repealed from 1 July 2017 that also previously applied].
Within an SMSF context, where the trustee and member are the same, the contribution should not make contributions that can’t be accepted. As we know, this isn’t always the case…
SISR 7.04(4) requires that any contribution that cannot be accepted must be returned within 30 days of becoming aware that it was received in a manner inconsistent with sub-regulation (1) or (2) of SISR 7.04. For an SMSF, the ATO considers that the trustees are aware that a contribution is in breach of the law when the individual becomes aware of the contribution itself, which means from the date of the contribution being made. However, circumstances will exist where this 30 day timeframe will expire and the contribution remains within the fund. It does not preclude the trustee from their obligation to return the contribution in these circumstances – refer to ATOID 2009/29 (now withdrawn) that outlines the requirement to return a contribution outside of the 30 day time limit.
Example: Excess contribution not returned within 30 day timeframe
Alice is 40 years old and a trustee and member of an SMSF. She makes a $1 million member contribution to the fund on 31 January 2017.
During the audit of her fund in August, the approved SMSF auditor points out that the fund has not complied with the super laws because:
- the contribution exceeded Alice’s fund-capped contribution limit for the 2016–17 financial year;
- the excess amount was not returned within 30 days of it being made.
Although Alice made the contribution, she claims that the fund wasn’t aware that it had breached the fund-capped contribution limit. This is because her bank only issues paper statements every six months and she received the statement covering her contribution in early July 2017.
As Alice is both a member and trustee of the SMSF, the fund is taken to have been aware of the fund-capped contribution limit.
It is not reasonable that a trustee, acting with the level of care, skill and diligence required of a trustee of a complying fund, did not check the affairs of the fund within the required timeframe.
In addition to an administration penalty of 20 units, the trustee must return the excess amount. If this does not occur, the Commissioner of Taxation may also give Alice’s SMSF a rectification direction requiring the excess amount of the contribution to be returned within a specified timeframe.
Contributions that are returned in accordance with the law of restitution don’t count towards the member’s contributions cap. The fund must amend its reporting to account for returned contributions.
In circumstances where the law of restitution does not apply, a fund must continue to report the contributions that were received, even if they were returned. The Australian Taxation Office (ATO) makes very clear that they will scrutinise any decisions made to return contributions ‘paid in error’, albeit recognising there are many circumstances where a decision to amend will be entirely correct. A failure to amend would be a failure to report correctly.
ATOID 2010/104 clarifies that where a contribution that is made and then subsequently repaid (in part or full) will require the trustee to report the full amount of the contribution as part of the member contribution reporting within the SMSF Annual Return.
Reporting contributions received
As an SMSF, the requirement is to report all contributions made for the member each financial year in the SMSF Annual Return (SMSFAR). As indicated above, the trustee(s) must report the total contribution and not the contribution less any benefits paid to the member in the same year (i.e. ‘contra’).
If the fund has amounts that must be returned as required by Regulation 7.04(4), these amounts should not be included within the member information of the SMSFAR as the fund is taken to have never accepted the amount as a contribution (i.e. show as a liability of the fund to repay). Again, the 30-day period of grace will apply to remove the contributions from the super system without breaching the preservation or contribution rules. Where this period expires, the member will not be able to take advantage of the defence provided by subregulation 7.04(5) of the SISR and will be in breach of the rules.
Contributions returned in accordance with the law of restitution don’t count towards the member’s contributions cap. The fund may have to amend its reporting to account for any such returned contributions.
If your fund returns a contribution inconsistent with the law of restitution the fund must continue to report the contribution for the member, even if it was returned.
Planning is required around contributions to ensure that not only are the contribution limits maximised to benefit members, but to also ensure that contributions stay within their limits.
Smarter SMSF has created a SMSF Tax Planning checklist (and webinar) that works through many of the contribution rules and considerations.
If you would like to purchase the Tax Planning checklist, you can purchase it now.
Learn members and SMSF Day attendees will receive this checklist free / as part of their membership.