Peter Burgess says there are penalties for breaching contribution caps that receive relatively little publicity.

Although the severity of the excess contributions tax (ECT) has been discussed at length, less publicised are the potential administrative penalties and other charges which may also be payable by individuals.

If recent ATO statistics are anything to go by, only about half of affected individuals and their funds are meeting their excess contributions tax “release authority” obligations in full. This means many self-managed super fund (SMSF) clients are running the risk of having penalties imposed on them for non-compliance, in addition to having to pay the ECT.

Individuals who exceed their superannuation contribution cap receive an ECT assessment and a release authority form from the ATO. In the case of non-concessional contributions tax, the individual must withdraw an amount equal to the ECT liability from their superannuation fund. However, administrative penalties may apply in addition to the ECT liability where:

• An individual does not provide the release authority to a superannuation fund within 21 days;

• An individual gives a release authority and the total amount released in accordance with the release authority exceeds the amount required to be released; or

• A superannuation provider does not release the required amount within 30 days.

A recent Practice Statement Law Administration (PSLA) 2011/24 issued in May 2011 outlines scenarios when the Commissioner of Taxation (the Commissioner) may waive penalties for non-compliance for ECT liabilities.

There are a number of factors that may result in the remittance of penalties and they fall under three broad categories. They are: a genuine attempt to comply, a moderate attempt to comply and no attempt to satisfy their obligations. The full details on how individuals and superannuation providers, including SMSF trustees, will be judged can be found in the PSLA on the ATO website.

If an individual or superannuation provider is deemed to have made a genuine attempt to comply, the total amount of the penalty will be remitted, while a non-attempt at compliance will result in no penalty remission. The moderate category will result in a partial penalty remission of anywhere between 25 and 75 per cent.

There are also practical situations not addressed by the legislation. Consider the real world example of an adviser who miscalculated the contribution caps of a client, resulting in an ECT notice being issued for an excess non-concessional contribution. The adviser acknowledged the breach was a direct result of their miscalculation and writes a personal cheque to cover the liability, only for the cheque to be returned by the ATO.

Although the intention of the adviser to pay for the breach is clear, the legislation states that the individual must provide the release authority to their fund within 21 days and then their fund has 30 days in which to remit the ECT to the ATO. Importantly, the funds to pay the ECT must come from the superannuation fund and not the adviser.

This can present a real problem, especially when the member is over the age of 65 and does not satisfy the work test and therefore cannot contribute any further funds to the SMSF to cover this liability. The only option in these situations is for the adviser to provide a compensation payment directly to the client outside of the fund.

The other issue brought up by the PSLA is situations where more than one administrative penalty may apply. For example, an individual who exceeds their non-concessional cap could be liable for a penalty for not giving a release authority to their fund within 21 days, and a penalty for requesting the release of more than the amount of the ECT liability.

The penalties also give rise to potential future liabilities in the way of general interest charges (GIC) imposed by the ATO if the penalty remains unpaid after it is due. Currently GIC rates for the June 2011 quarter are 11.92 per cent, which can quickly compound into a large sum.

Advisers must ensure they are fully aware of what is required if their client receives an ECT assessment and release authority. Ensuring you are aware of all the deadlines and what may be considered a breach from an administrative perspective is crucial to ensure your client will not incur any additional penalties on top of their ECT liability amount.

Peter Burgess is national technical director of the Self-Managed Super Fund Professionals’ Association of Australia (SPAA).