Mistake management

Since the 2017 reforms, the superannuation industry has experienced contribution changes at the commencement of each financial year, as well as part way through the year as is the recent case with the downsizer rules.

With no less than 25 changes in that timeframe, including indexation, it is little wonder people make contribution errors. This article takes an in-depth look at some of the critical elements to avoiding making such mistakes.

Trustee contribution acceptance rules (from 1 January 2023)

The Superannuation Industry Supervision (SIS) Regulations outline the requirements for the acceptance of contributions, whereas the Income Tax Assessment Act 1997 (ITAA) primarily defines the types of contributions, any notice requirements and any penalties/liabilities linked to various contribution types. Table 1 summarises the trustee acceptance capabilities from SIS regulation 7.04.

In addition to mandated employer contributions and downsizer contributions, a fund may also accept contributions made in respect of a member received on or before the day that is 28 days after the end of the month in which the member turns 75, due to a recent amendment to the work test.

Work test requirements

The work test previously formed part of the trustee assessment process to determine whether or not a fund could accept a contribution for a member aged 67 and over. From 1 July 2022, it is no longer a trustee requirement to assess the employment status of the member.

This requirement now sits with the member and is contained within the ITAA where eligibility to claim a personal tax deduction now includes enhanced agerelated conditions.

In essence what this means is all non-employer contributions received into an SMSF are nonconcessional contributions until such time as the member lodges a notice of intention to claim a personal deduction. Further, if a member makes a contribution under the assumption they will claim a deduction and then doesn’t, or isn’t eligible to do so, this may result in excess non-concessional contributions (NCC).

Contribution strategies

When considering the use of various contributions strategies, the first step is determining whether the fund is eligible to accept a contribution, using Table 1 as a reference.

Once it is determined a fund can accept a contribution, it is necessary to know whether or not any restrictions apply to the types of contributions in question or the strategy itself. The most common deterrents to contributions strategies are:

• member/spouse age and income levels,

Item If a member is: then the fund may accept contributions made in respect of the member that are:

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• the general transfer balance cap,

• the member/spouse total superannuation balance, and

• contribution election requirements.

Contribution elections

There are a number of election/notification requirements a member/fund must satisfy either directly before the contribution is made, at the time it is made, or after it has been made. These notices serve a purpose of assisting to identify certain contributions, but also serve a greater purpose of helping individuals to avoid exceeding their contributions caps.

The following Table 2 provides a list of contribution strategies/events that require an election or notification of some description and who the election/notice must be provided to.

Returning contributions

When contemplating these election/notice requirements, a matter of most significance between the prior and current regulations is the capacity to return contributions via SIS regulation 7.04(4).

The rules dictate where a contribution is received that is inconsistent with the regulations, it must be returned within 30 days of the trustees becoming aware of the situation. The removal of the work test from the regulations has a significant impact, ultimately limiting the return of contributions in most instances to only apply to those made post age 75, with the exception of genuine errors. Proving a genuine error has been made to the ATO could be a significant challenge.

Prior to 1 July 2022, there was capacity for the fund to return member and nonmandated employer contributions where the individual was over 67 and did not meet the work test requirements or work test exemption. It meant many of the contributions using strategies and elections identified above could in certain instances be returned by the fund. For example, if the member was over 67 and made a downsizer contribution when ineligible to do so, and was also not eligible to make an NCC, then the amount would need to be returned.

Now, by using the downsizer concept, if a member is 70 and uses the strategy but it is determined they do not qualify for that type of contribution, then while that contribution is in essence a mistake, it is now considered an NCC and measured against the individual’s cap to determine if it is an excess NCC. It cannot, however, be directly returned to the member.

As such it is important to understand what is and is not a concessional contribution and NCC and the impact of making either.

Excess contribution rules

Divisions 291 and 292 of the ITAA provide for determining those contributions that will count towards the concessional and NCC Table 2: Elections contribution caps. They also provide for exceptions to the standard caps such as carry-forward concessional contributions and bringforward NCC.

NCCs

The rules around NCCs are more comprehensive than those for concessional contributions as there are far more moving parts in determining whether an individual has exceeded their NCC cap.

If a person has breached their NCC cap, then the choice the individual makes as to what to do subsequent to this occurring has different implications, with some courses of action offering better outcomes than others.

NCC cap link to concessional cap

The non-concessional cap is directly linked to the concessional contribution cap. For instance, the general NCC cap is four times the concessional cap. However, this link does not include the increase to the concessional cap attributable to the carryforward rules.

Further, a member’s NCC is nil if their total superannuation balance at the previous 30 June is equal to or greater than the general transfer balance cap, currently $1.7 million.

The cap in no way prohibits the trustees of the fund from accepting contributions, nor does it intimate contributions made in excess of the cap are subject to the SIS refunding rules. It merely dictates that any NCC above it will be excess NCC.

Therefore it is critical to know what is considered an NCC so individuals can determine whether their contributions are subject to the cap.

Key considerations for NCC cap

Excess concessional contributions not released from the superannuation system count towards the NCC cap.

The following are also considered NCC:

• personal contributions not subject to a valid ITAA section 290-170 notice of intention,

• contributions made by the member’s spouse on the member’s behalf, and

• all transfers from foreign superannuation funds where the amount is not subject to an election to tax the applicable fund earnings in the superannuation fund. While some contributions are specifically excluded from the NCC cap, they will count if the conditions as stipulated in the ITAA are not met.

Those sections and the various exceptions are as follows and were all identified previously as contributions that require an election/notice:

• section 292.95 – contributions arising from structured settlements or orders for personal injuries,

• section 292.100 – contributions relating to some capital gains tax small business concessions,

• section 292.102 – downsizer contributions, and

• section 292.103 – COVID-19 recontributions.

Needless to say the size of these contributions could cause major NCC cap issues if the conditions are not met and the amounts involved are significant.

What happens when you exceed your caps

When an individual exceeds either of their contributions caps, it results in the ATO issuing a determination outlining the options available to them.

Concessional contributions

The concessional contribution determination will advise how much of the contribution will be included in the individual’s assessable income, subject to a 15 per cent tax offset.

Individuals will also be provided with the option to release the excess amount from the superannuation environment, which constitutes 85 per cent of the amount allowing for tax, or to leave the money in super. As alluded to above, leaving it in super means the amount will count towards the NCC cap. Electing to release the amount will result in the ATO issuing the nominated fund with a release authority. Individuals have 60 days to make their election.

Ncc

The NCC determination will outline the excess amount and the amount of associated earnings attributable to the monies above the cap.

Individuals will be provided with two options and again the election must be made within 60 days.

Failure to make an election will result in the ATO adopting option 1 as it results in the lowest tax liability.

Option 1

Release the excess NCC and 85 per cent of the associated earnings. If this option is selected, the associated earnings in total will be added to the individual’s assessable income and they will receive an amended notice of assessment incorporating this amount and a 15 per cent tax offset. The entire amount in question must be released by the ATO and not the fund member. The regulator will issue a release authority to the nominated fund, and the fund has 10 days in which to release the money.

Option 2

Option 2 is to elect to leave the excess NCC in the fund. This will result in the amount being assessed for excess NCC tax, which is currently 47 per cent. This tax must be paid by the fund and the ATO will issue the fund with a release authority.

While the consequence of making contribution errors is not as dire as it once was, it can still be a painful exercise for individuals and SMSF trustees. Best to understand the rules and get it right the first time.

The SMSF National Conference 2023 returned to its usual place on the industry events calendar – February. Over 1000 delegates descended upon Melbourne to enjoy a variety of technical presentations and networking opportunities.