The Australian Taxation Office’s (ATO) interpretation of excess contributions tax is “too narrow”, according to Peter Bobbin, partner at Argyle Lawyers.
Bobbin told the 2011 Self Managed Super Fund Professionals’ Association of Australia (SPAA) national conference that the ATO view of discretion is too narrow as the tax is affecting middle and upper-middle Australians.
“The anecdotal evidence that I’ve got from dealing with [financial planners] is: Who gets hit with the contribution tax?” he said.
“It’s not hitting the high net-worth and it certainly doesn’t hit the poor buggers that can’t afford to put anything into super, or not much at all.
“It’s actually hitting middle and upper-middle Australians, which from a political perspective is absolutely insane.
“I think that message needs to be told across all the political parties – that they’re at risk if they don’t do something about this particular tax.
The ATO defined approximately 35,000 cases of excess contributions for the 2007/8 financial year. Contributions to a superannuation fund that exceeds both concessional and non-concessional caps in a financial year could end up being taxed at 93 per cent overall.
In addition, the ATO has admitted that 10 per cent of super member contribution statements or the annual return for self-managed superannuation funds (SMSFs) are incorrect.
“So that can in fact be a good place to start. Was the information given to the tax office itself incorrect in some manner?” Bobbin said.
He said it’s “a tax that’s out of control … I just read the philosophy [for the tax] and think it’s a joke; it’s an excuse”.
“If what the Government actually did was to help the tax office in changing some of these rules to enable them to open up its thinking, because it’s not open, then it would ameliorate quite a lot of the problems that exist.
“I’ve seen people’s retirement funds decimated [and] substantially affected by this contributions tax.”
He challenged the terminology of ‘genuine inadvertent breaches’ and said it is a mistake in almost all cases.
“Does you know anyone who’s actually intended to make excess contributions? My experience is that it’s absolutely inadvertent.”
Bobbin also said that the concept of special circumstances in its practice statement is also written too narrowly by the ATO.
“They seem to want to look at it from an objective ‘fact’ situation,” he said.
“So they want to look at all the facts and they’ve decided based upon the facts as to what special circumstances may be.
“It is not about the objective facts, it’s all about the person and that’s the way special circumstances need to be looked upon and assessed.
“We’re here to find out and work out what’s fair and reasonable so it’s a very malleable concept and principle, which is one of the reasons why the tax office made a mistake because it’s looked at it from a doctrinal perspective.
“I’m having a go at the tax office because the interpretation approach they’ve taken is in my view too narrow. At the end of the day, they’ve just got to administer what is essentially a bad law.”
Bobbin said that not making reasonable enquiries with clients is “a major problem for the financial services profession”.
“There are hundreds of claims against financial planners in the excess super contribution [area],” he said
“I’m aware of one dealer group that paid out $3 million in compensation payments.
“You need to go back. You need to ask, ‘What’s happened in the current year? What happened in the year prior and the year prior to that?’
“You need to understand every element [of your client’s actions] as it relates to contributions.”
I agree with Peter and other comments – I also think part of the problem is that the caps are too low. I think a cap of $75,000 for those over 50 (together with $750,000 in super instead of $500,000 as is currently being proposed) would be more reasonable. I think a more reasonable cap for those under 50 would be $45,000. Surely it is better to encourage Australians to fund their own retirement rather than relying on Social Security payments funded by a shrinking tax base and borrowings.
Thnx Peter,
Indeed to make excess contributions deliberately one would need to rival the intellect of those mentally challenged legislators that conceived this tax. I had one client that had two advisors before me and I checked with the client if any recent super contributions had been made. The recorded answer was no and I only had paperwork going back one advisor. As it happened a re-contribution strategy was made long before the previous advisor. End effect, I rather paid the (substantial) PI excess than having this elderly client wiped out by this tax. One of the most annoying aspect is the deafening silence by our weak industry body that is as useful as the proverbial on a bull.
Hi all
Please advise if anyone has had any luck with this.
ATO releases further comments on excess contributions tax
The ATO has released additional information on excess contributions tax, including certain scenarios and examples where discretion could be applied.
Mark
Well done Peter Bobbin for speaking out on this.
I have no problem with having penalties in place for breaching contributions caps if the Government’s intention is to have some mechanism in place to limit the level of tax concessions given to superannuation (currently around $24 billion pa.)
However, the way in which this tax is currently being applied is, in many circumstances, completely unjust. Surely draconian penalties such as an effective tax rate of 93% should only be reserved for those situations where there has been a deliberate attempt to subvert the contributions cap regime. Instead we have the ATO crucifying people for inadvertent mistakes which they are not even allowed to rectify. A just approach to caps regime would recognise that the purpose of the caps is to limit the tax concessions and, if the breach was a mistake, allow it to be rectified. This approach would preserve the integrity of the system without causing unnecessary hardship to thousands of people who had no intent to break the law. As advisers, we are at the coal face on this issue and I encourage anyone who also believes the application of this tax is unjust to email Bill Shorten to let him know your thoughts.
Good for you Peter. This is a ridiculous tax. You’re right, no-one ever makes excess contributions on purpose. It is always a mistake and as a financial planner, I have found this heavy-handed hard-line attitude towards excess contributions is scaring people away from making extra super contributions – just so they can be certain they won’t breach the caps and get a nasty letter from the ATO. It’s also highly stressful for financial planners as the potential financial consequences for them too can be disastrous, as highlighted in the article.
I also believe super funds could be far more helpful on this issue. The way the law stands now, they only have to refuse the contribution if the cap is breached in a SINGLE contribution. I understand it is impossible to monitor if contributions are made to different super funds but surely it is not that difficult for super funds to be more proactive in monitoring total contributions during a financial year and alerting someone to a potential problem!
Good luck fighting your cause – I’m confident you would have a LOT of support from the financial planning industry.
The solution to this problem is very simple, set separate caps to salary sacrifice and exclude SGC contributions from the cap.
The whole problem is that financial planners cannot control how and when employers contribute SGC contributions.
In every case were excess contributions have occurred the employer has changed SGC and caused the breach. In many cases where we warn them of the consequiences of bringing forward SGC contributions they merely state that it is our problem and not theirs.
To bring about compliance we need certainty and that means that SGC must be removed so we can structure salary sacrifice without the fear of breaching the caps.
Peter Bobbin hit the nail right on the head. Almost no member and trustee deliberately contribute over their caps! Why would they? There is too much tax liability at stake! I do believe we need some retrospective help from the ATO on this issue.