It’s THE hot topic at the moment. Up there with fees, commissions, rebates and what brand of suit Jeremy Cooper wears...
Refunding super contributions has always been a difficult area, but the tempo has stepped up in the last month since the ATO started sending out excess contributions notices. Many super investors have found themselves holding large bills for excess contributions tax arising from honest mistakes or misunderstanding consequences.
Situations where clients have found themselves caught out include:
The simplest solution would be for the super fund to refund the excess contributions and report the adjusted contributions to the ATO. Sounds easy? Wrong...
If a super fund refunds contributions to a member or employer outside very limited legal windows, the penalties on both the fund and the investor are severe. The super fund may be in breach of the trust, its license and SIS regulations etc. The investor may be liable for the excess contributions tax already owed and the refund may be fully taxable as a payment in breach of the SIS regulations.
There are limited situations where a refund of contributions can be made. These are:
1. Refunds under the SIS regulation 7.04(4)
A trustee is required to refund a contribution (adjusted by earnings) within 30 days of becoming aware that:
The super fund must re-report the amended contributions to the ATO.
Case 1: The client had made a single personal contribution of $550,000 and provided a 290-170 notice for $100,000 of the contribution. However the ATO only allowed a $20,000 deduction, and consequently the client exceeded the NCC cap by $80,000. We accepted a variation to the 290-170 Notice, and as it had been a single contribution we could refund the $80,000 contribution.
Case 2: Similar situation to the above case however the client had already transferred to pension phase. No refund could be provided as once a pension commences a variation to the 290-170 notice cannot be accepted.
2. Refunds on the grounds of mistake of fact or law or other restitution principles
Some super funds do not allow any refunds other than the mandatory ones provided for in SIS Reg 7.04(4). However for most super funds, if a contribution is made by mistake, it can be refunded as long as the mistake caused the contribution.
What is a “mistake” can be a very grey area in the law. Some clear cases are:
Outside these obvious situations the law gets murky and it depends on the circumstances.
Key issues to note are:
1. A “change of mind” is not a mistake
If, after the contribution is made the client changes their mind about making the contribution, this is not a mistake and no refund can be made.
2. A “mis-prediction” is not a mistake
This happens when a client does not make a mistake about the actual contribution, but makes a mistake about the consequences of that contribution.
3. Exceeding the NCC and CC Caps – a “mis-prediction”
When the ATO sent out excessive contribution notices, some members approached their super funds asking for a refund of those excess contributions. Unfortunately, unless a case could be established under the SIS regulations, refunds were not available. This is because at the time the contribution was made there was no mistake in the amount of the contribution made, just a mistake in the tax consequences of it.
We try our best to stop client problems before they arise. With the Pursuit, Lifetrack and IOOF Portfolio Service super platforms, the administration system can identify when an amount sent to us exceeds the NCC or CC cap. Before we credit the contribution, we can contact the client or adviser for confirmation that the contribution was not made in error.
This degree of monitoring is not compulsory for super funds. The only responsibility a super fund has under the caps is to ensure that single undeducted personal and spouse contributions do not exceed $450,000.
The ATO and APRA have taken a very conservative position when it comes to refunds on the ground of mistake. But at least they have accepted that refunds on the ground of mistake of fact and law exist.
The ATO has released a very conservative preliminary view (see minutes to National Taxation Liaison Group meeting 3/12/08) and has promised a further paper on the issue to be circulated shortly. APRA has set out its views in Superannuation Circular IA1.
Hopefully as a result of industry pressure on the Government it will take a fairer position with respect to refunds of contributions, especially as a consequence of some of the more draconian results that have arisen with excess contributions tax recently.
It is likely 2009/10 will be difficult year for advisers and clients as the CC cap has dropped to $25,000 ($50,000 if aged 50 or more). This may catch a number of clients unawares. Advisers should be looking now at their clients’ arrangements in the light of the reduced caps, particularly salary sacrifice.
Advisers should also note the very conservative position taken by the ATO on refunds of contributions and the very limited circumstances they are available.