Small errors can result in big problems when it comes to excess contributions. Bryce Figot explains.
Excess contributions tax has been with us now for almost five years. However, it is still catching taxpayers out. A seemingly minor oversight can result in a massive excess contributions tax liability. Accordingly, vital care must be taken when making contributions.
Latest from the Australian Taxation Office
The ATO identified about 40,000 people who potentially exceeded the caps in the 2007-08 financial year. Further, about 30,000 in respect of the 2008-09 financial year were identified.
The Commissioner can disregard or reallocate excess contributions. However, there must be “special circumstances” in order for this to occur. The ATO reports that applications for discretion are lodged for about 8 per cent of all excess contributions tax assessments. Of these discretion requests, about 20 per cent have so far been successful. This means about 98 per cent of assessments are maintained. In other words, it is statistically very unlikely – only a 2 per cent chance – that the Commissioner will exercise his discretion to effectively set aside any excess contributions tax liability that might arise.
‘The Commissioner treated this as being a withdrawal and then a contribution to the second fund’
The ATO reports that there appears to be a variety of causes for contributions that exceed the caps. The first cause listed is taxpayers failing to take into account available information when planning their contributions for a financial year.
Latest from the Administrative Appeals Tribunal
The recent AAT decision, Player and Commissioner of Taxation [2011] AATA 35, arose in respect of an excess contributions tax issue. Specifically, the taxpayer (Mrs Player) asserted that she was advised by her financial adviser to roll superannuation benefits from one fund to another. However, she also asserted that she was advised to transfer the benefits not directly from one fund to another. Rather, she asserted that she was advised to transfer the money from the first fund to her personal bank account and then to the second fund. She said that the “said sum … was only in [her] … personal bank account long enough … to draw the bank cheque in favour of [the second fund], that is, just a few minutes”. She submitted that she did not accept the money in her personal capacity. Rather, she submitted that she intended it to be for the benefit of the second fund and accepted the money as a trustee for the second fund.
The Commissioner, however, treated this as being a withdrawal and then a contribution to the second fund. This gave rise to an excess contributions tax issue.
Mrs Player appealed the Commissioner’s treatment to the AAT. The AAT, however, upheld the Commissioner’s treatment. As at the time of writing, it has been reported that the taxpayer is further appealing to the Federal Court.
However, the important point for this article is this: the financial adviser was not asked to provide evidence. This was because the taxpayer’s solicitor had contacted the financial adviser’s firm. The solicitor had notified the adviser’s firm that the taxpayer would be seeking it to indemnify her for any loss suffered by her as a result of her following the advice given. Accordingly, the solicitor formed the opinion that it would be futile to ask the adviser to provide evidentiary assistance in the proceedings. Naturally, this is because the evidence may prejudice the firm in respect of foreshadowed proceedings against it.
This illustrates that where an excess contributions tax liability arises, clients often do become quite irate in respect of advisers. Because only 2 per cent of all assessments receive the Commissioner’s discretion, often the practical option for clients is to sue advisers. 
The following case studies illustrate the danger that is present.
Case study
Often, in the lead-up to age 65, clients wish to “max out” their contributions caps. Jerry is no different. Working with his adviser he makes the following contributions (as shown above, in the first table):
Naturally, the above contribution schedule does not give rise to any excess contributions tax liability.
However, it is then discovered that in the 2010 financial year Jerry actually had some part-time work and employer superannuation contributions of $100.
This significantly changes everything. Due to the $100 contribution, the contribution schedule is actually as follows (as shown in the second table):
This means that in the 2010 financial year there is an excess concessional contribution tax liability of $31.50 (that is, $100 x 31.5 per cent). In the 2011 financial year there is an excess non-concessional contribution tax liability of $69,796.50 (that is, $150,100 x 46.5 per cent).
In other words, the $100 contribution attracts tax at an effective rate of almost 70,000 per cent!
Unless there are fairly extraordinary additional facts, it seems unlikely that these facts would constitute “special circumstances”. Accordingly, it is unlikely the Commissioner would disregard or reallocate the excess. Therefore, other than paying the excess contributions tax, the only option remaining for Jerry to ensure that he is not out of pocket is to sue his adviser.
This raises the question of whether the oversight of the $100 contribution is actually the adviser’s fault. Naturally, the exact answer depends on specific facts.
Practical action
It is strongly recommended that before advisers provide contributions advice, they take great care in identifying all contributions for the past few years. Clients must be made aware that if they fail to tell advisers about any possible contributions (for example, the $100), they could attract significant tax.
