Excess contributions are an ongoing issue for superannuation advisors and members. In our Update of
31 March 2011 we disagreed with the Commissioner’s view in Taxpayer Alert TA 2010/2, which cast doubt over the validity of clauses that permit the trustee to return amounts, such as excess contributions, paid to the fund.
The Commissioner has now withdrawn TA 2010/2 and acknowledged that despite the concerns set out in TA 2010/2, the Commissioner has concluded that some trust deed clauses may prevent a payment to the trustee from forming part of the fund and therefore, from being a contribution for excess contributions tax purposes.
However, while the Commissioner has withdrawn TA 2010/2, the Government has announced that as part of its Mid Year Economic and Fiscal Outlook for the 2012 income year, it will maintain the integrity of the contribution caps by ensuring that trust deed clauses cannot be used to avoid excess contributions from being counted against the caps.
Under the measure, where a trustee has accepted a payment to the fund and combined the contribution with other fund assets, the trustee will be deemed to have accepted the contribution, notwithstanding a clause in the trust deed that states otherwise.
Power to return amounts
In light of the withdrawal of TA 2010/2 and the proposed amendments to the law that deem contributions to have been made to a fund in certain circumstances, it is important to ensure a clause preventing a trustee from accepting a certain payment is effective in light of the trust deed as a whole and to consider whether the respective clause covers all types of payments or only certain categories, such as fund capped contributions or payments that fall within the recognised categories of mistake.
On the basis that the particular clause is effective, the entity making the payment is not entitled to a deduction available for superannuation contributions. The payments should be held on a separate trust, which means that the earnings will be taxed in the hands of the beneficiary for income tax purposes.
Importantly, the Commissioner takes the view that if the trustee does not identify payments that do not form part of the trust and combines these payments with the trust fund, the trustee may breach its duties under the terms of the trust deed.
What steps should you take
In the interim and subject to the wording of the new measure, it is important that trustees take the following steps to ensure that certain payments to the fund can be returned to the contributor without breaching either tax or trust law:
- ensure that the trustee has power in the trust deed to return an amount paid to the fund in excess of the contribution caps or by mistake;
- identify and hold any contributions to the fund on a separate trust until the trustee has determined whether the trustee can accept the contribution;
- for payments that the trustee cannot accept under the terms of the trust deed or regulation 7.04 of the Superannuation Industry (Supervision) Act 1994 (ie fund capped contributions), the trustee should return the payment as soon as possible to the person making the payment; and
- the payer should ensure that the amount is treated as though it was never contributed to the fund, such that the payer should not claim a deduction for the contribution.
From a practical perspective, any amount held on a separate trust should be taxed in accordance with the taxation provisions applying to a fixed trust rather than a superannuation fund.
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