Contributions to superannuation form the core of retirement planning strategies for most Australians. Financial planners appreciate the value that a combination of compulsory savings, preservation and tax effectiveness can deliver to their clients, and superannuation balances form the bulk of funds under advice for most financial planning practices.
The benefits of increasing these balances for both the client and the financial planner through regular contributions, however, must be finely balanced with the risk of exceeding the client’s contributions caps; a single error can have financially disastrous consequences for both parties.
For the client, tax on excess contributions can exceed 93 per cent and result in administrative penalties from the ATO. For the financial adviser, the cost could include client compensation, reputation damage, increased professional indemnity insurance premiums, an increased administrative burden and stress.
It has been reported that Treasury did not estimate any revenue from excess superannuation contributions in their early projections, assuming that taxpayers would not exceed their caps due to the punitive nature of the tax payable on breaches. Unfortunately, the regulations governing the contributions themselves are diverse and complex, and it has been estimated that the ATO has received over $400m in revenue to date, from largely unintentional breaches.
Over 65,000 letters were issued to affected taxpayers for the 2009-10 financial year.
Given the complex nature of the regulations governing the caps, taxpayers receiving professional financial advice have not been immune from errors. Simple scenarios resulting in excess contributions have included taxpayers receiving contributions from multiple employers, market movements increasing the value of in-specie transfers before the execution date and employers insisting on paying 9 per cent on the employee’s base salary even where it exceeds the maximum contribution base.
Lesser known requirements, however, have resulted in excess contributions, such as failure to provide a notice with a contribution under the small business CGT cap, neglecting to consider notional taxed contributions to a taxed defined benefit fund and deductions being disallowed where the client has commenced a pension or rolled over their contributions prior to submitting a valid notice to claim a tax deduction.
The effect of an excess contributions notice and the subsequent tax penalty on a financial planning business is severe.
The client’s initial confusion often becomes fear and anger once the error becomes apparent, and the adviser’s credibility may be irrevocably tarnished.
At best the adviser-client relationship is tested.
Superannuation trustees can only disregard or reallocate a contribution in extremely limited circumstances, and the Commissioner of ATO has been clear regarding the equally limited circumstances in which clemency will be granted, leaving limited options for restitution to the client. Licensees may offer support in the form of technical advice, complaints handling and liaison with PI insurers should all other avenues be exhausted.
Ultimately, however, the client’s asset base has been eroded and his or her trust in the advice provided is likely to have diminished.
Excess superannuation contributions are clearly an area in which an ounce of prevention is worth a pound (or several pounds) of cure.
Most licensees and product manufacturers have technical experts available to assist with queries regarding contributions, and many have produced tools and educational guides to assist with ensuring your knowledge of the requirements is up to date. For example, MLC has just launched a Contributions Cap Decisions Tool to give planners a step-by-step guide through the minefield.
Finally, educating your clients about the risks of contributing to super will ensure they continue to seek and value your advice when investing for their retirement.
Gemma Dale is head of MLC technical services.
You seem to assume that the onus of the contributions caps rests solely with the Adviser. Many of the points you bring up have nothing to to do with the advisr but the employer, client and tax adviser. In the case of failing to submit a 290.170 form, this is the responsibility of the client and more specifically the tax agent who cannot / should not lodge a deduction without the necessary confirmation from the super fund. Much the same could be said for the CGT requirements. Where funds are rolled over mid year, this could raise isses with an adviser if they have been involved in such a roll over. Otherwise much of the onus is clearly with the taxation fraternity and the client generally. What you seem to be implying is that all the above is the problem of the adviser. Sorry, but that is simply not the case. Only where advisers provide comprehensive superannuation advice will this become a major issue. For the majority of the others, it simply is not the responsibility of the adviser irrespective of various agencies and organisations implying that it is. I challenge you to read the documentation from the ATO on all these matters. It clearly rests with the client and the tax agent/accountant.