Exercise of Discretion In Special Circumstances – Excess Contributions Tax – (pre-1 July 2013)
This commentary applies to the position generally as it applied before 1 July 2013 to other than minor breaches and the relaxation to allow taxing at normal rates for refunds of excess contributions made possible under changes from after 30 June 2013.
Excess contributions tax is applied to superannuation contributions which exceed the allowable caps.
When the cap has been breached for a financial year, you have a number of limited courses of action available.
Along with the normal income tax assessment review rights, the Tax Office can be requested within 60 days (which can be extended with permission) to exercise discretion to disregard or reallocate contributions based on “special circumstances“. (Section 292-465 ITAA1997)
Since 17 November 2010, the Tax Office discretion can also be exercised before an assessment is received.
ATO Practice Statement PS LA 2008/1
The Tax Office has issued guidance on the nature of “special circumstances” in the form of Practice Statement PS LA 2008/1, which also lists some examples of the factors taken into account.
The official view of ‘special circumstances’ is fairly narrow, expressed as “.. more likely to arise where the person for whom the contribution is made has no control over the timing or amount of the contribution.” (emphasis added)
Examples provided in the Practice Statement indicate a Tax Office view that the excuse “it’s not my fault!” is not good enough: mere lack of control over the circumstances giving rise to excess contributions is not enough; other factors are required to support a conclusion that an excess contributions tax would in the circumstances be “unjust, unreasonable or inappropriate“.
(Note that from 2011-12 onwards the law was changed for the treatment of minor one-time breaches of less than $10,000 of the concessional cap.)
To help paint the picture of the Tax Office’s approach, the following examples are drawn from Practice Statement PS LA 2008/1:
- an excess contribution arising from Tax Office action over an employer superannuation guarantee shortfall is deemed to meet the requirements primarily because the taxpayer lacked control over the timing and could not have foreseen the actions of either the employer or the Tax Office subsequently.
- Employee receiving a “reasonably foreseeable” bonus giving rise to an excess contribution through salary sacrifice is deemed not to demonstrate special circumstances
- A cumulative bonus paid after 5 years giving rise to an excess contribution paid under the terms salary sacrifice agreement is deemed “not sufficiently unusual or out of the ordinary” to demonstrate special circumstances
- A request to reallocate large lump sum contributions to earlier years which would avoid ECT by taking advantage of the bring forward concessions is not able to be granted because the excess contributions when made were “reasonably foreseeable” and “not unusual or out of the ordinary”
- Misreporting of a payment based on the processing date of a contribution paid by cheque, rather than the date the cheque was tendered is sufficient to cancel an assessment on the basis of the facts (the potential excess contribution being attributed to the earlier year in which the cheque was tendered in payment).
- An (implicitly inadvertent) excess non-concessional contribution of $5,000 over a bring forward cap of $450,000 – the $450,000 contribution being the (presumably once-only) proceeds of an inheritance – is not deemed sufficiently unusual or out of the ordinary, is reasonably foreseeable and the timing controllable.
- ECT flowing from a salary sacrifice contribution paid late by an employer, contrary to the terms of a salary agreement and past practice, and without the prior knowledge of the member, was deemed to be not “reasonably foreseeable” and outside the member’s control, therefore being potentially “unjust, unreasonable or inappropriate”. This example nevertheless comes with a warning to employees to “be aware of the payment patterns of their employers and factor this into any decision to alter or amend any concessional contributions”.
- ECT on a contribution which exceeded the concessional contributions cap because of incorrect timing due to an employer’s failure to make contributions in accordance with the terms of the salary sacrifice agreement deemed to be outside the member’s reasonable control, even though it might be foreseeable.
- An unforeseeable exchange rate fluctuation giving rise to a $2,000 excess on a $150,000 contribution may give grounds for discretion to be exercised, but other factors such as the precautions undertaken by the member to prevent a breach would be relevant
- Transfer of an overseas fund which could not be broken down into amounts under the cap deemed to be a foreseeable breach and “not sufficiently unusual or out of the ordinary”
- A re-contribution simply made to restore funds which had previously been released to meet an ECT which itself had been subsequently removed by an amended assessment, deemed to be special circumstance, and therefore the imposition of ECT on this amount for the breach of the non-concessional cap in that year would be “unjust, unreasonable or inappropriate”.
Specifically ruled out of ‘special circumstances’ are:
- financial hardship
- ignorance of the law
- incorrect professional advice; and
- retrospective or adverse changes in the law
A number of other examples provided by the ATO have indicated a view that such life events as depression, stress, illness and bereavement are also considered in most cases to be “normal and unexceptional”, and will not alone indicate special circumstances.
The Tax Office’s Decision Impact Statement on the Longcake Tribunal decision – a case which the Commissioner lost – sets out additional circumstances under which discretion was exercised to adjust excess contributions: Longcake and Commissioner of Taxation
The overall stance by the ATO on what constitutes special circumstances is quite restrictive. Their commentary makes it clear that each decision is based on its own circumstances; the facts having to be “unusual, uncommon or exceptional” to justify the exercise of discretion.
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This page was last modified on 13 July 2015