Conduct of the review
1.1 This is the report of the Inspector-General of Taxation's (IGT) review into the Australian Taxation Office's (ATO) administration of the superannuation excess contributions tax (ECT). The report is produced pursuant to section 10 of the Inspector-General of Taxation Act 2003 (IGT Act 2003).
1.2 This review is one of three concurrent reviews examining aspects of the ATO's compliance approaches to individual taxpayers. The other reviews look at the ATO's income tax refund integrity program1 and its use of data matching.2
1.3 During public consultation for the IGT's 2012-13 work program, a large number of stakeholders raised concerns with the ATO's administration of the ECT. The IGT commenced this review in response to those concerns and pursuant to section 8(1) of the IGT Act 2003. The IGT undertook further community consultation to better understand these stakeholder concerns, which are reflected in the terms of reference issued on 20 November 2012 and reproduced in Appendix 1.
1.4 The IGT received a large number of submissions, many of which were from taxpayers affected by the ECT. Submissions were also received from tax agents and their respective representative bodies, legal practitioners, superannuation funds and their respective industry associations. The IGT also met with interested stakeholders to better understand their experience in dealing with the ATO on different aspects of the ECT. The main concerns which emerged through submissions and meetings with stakeholders were that:
- the ECT disproportionately penalises taxpayers for genuine mistakes or matters beyond their control;
- there are difficulties associated with determining the accuracy of information relied on by the ATO to identify excess contributions and the channels through which such information could be corrected where taxpayers felt there were errors or inaccuracies;
- the ATO is adopting an inconsistent and narrower approach in relation to the Commissioner's discretion to disregard or reallocate excess contributions than is warranted by the legislation;
- there is insufficient communication by ATO officers and limited opportunities to engage with ATO officers in relation to ECT issues; and
- there is insufficient public advice and guidance in respect of the ECT.
1.5 The IGT has liaised with ATO staff from the Superannuation business line who have primary responsibility for administering the ECT. In addition, the IGT examined case documents from the ATO's enterprise case management system, Siebel, to better understand taxpayer concerns in this area and analysed ATO statistics relating to performance and impact of the ECT.
1.6 The IGT has also worked progressively with ATO senior management to distil potential areas for examination and to agree on specific improvements.
1.7 In accordance with section 25 of the IGT Act 2003, the Commissioner of Taxation (Commissioner) was provided with an opportunity to make submissions on any implied or actual criticisms in this report.
The Superannuation system and the Excess Contributions Tax
1.8 The superannuation system is an integral aspect of Australia's retirement income system. It seeks to ensure that Australians save for their retirement throughout their working lives. This is achieved through a combination of superannuation contributions compulsorily made by employers which may be supplemented by taxpayers' own contributions. As part of the 2006-07 Federal Budget announcements, the Government announced significant changes to the superannuation system to 'improve retirement income' and 'improve incentives to work and save'.3
1.9 One such change was the enactment of the ECT regime,4 which commenced operation on 1 July 2007, to replace the Reasonable Benefits Limit (RBL) approach which had preceded it. Whereas the RBL sought to limit the amount of concessionally taxed benefits which taxpayers could receive on retirement, the ECT regime limits the level of contributions made by, or for, a taxpayer which may receive concessional tax treatment. In order to manage the amount of contributions which may be made in any given year, the ECT imposes tax on contributions which exceed certain statutory limits or 'contributions caps'.
1.10 Accordingly, while the ECT does not render it unlawful for taxpayers to contribute amounts above the contributions caps, the tax imposed seeks to deter excess contributions being made in any particular financial year and provide incentive for taxpayers to save and contribute smaller sums over the course of their working lives.
What is a contribution?
1.11 As the ECT is applied to contributions made by or for an individual, it is important to understand what constitutes a 'contribution' for the purposes of the ECT. While the legislation does not define 'contributions', the ATO is of the view that:5
In the superannuation context, a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.
1.12 The capital of a superannuation fund may be increased directly in a number of different ways, including:6
- transferring funds to the superannuation provider;
- rolling over a superannuation benefit from another superannuation fund;
- transferring an existing asset to the superannuation provider (an in specie contribution);
- creating rights in the superannuation provider (also an in specie contribution); or
- increasing the value of an existing asset held by the superannuation provider.
1.13 It is also possible to indirectly increase the capital of a superannuation fund by:7
- paying an amount to a third party for the benefit of the superannuation provider;
- forgiving a debt owed by the superannuation provider; or
- shifting value to an asset owned by the superannuation provider.
1.14 For taxpayers who are aged between 65 and 74, certain contributions may only be made where these taxpayers meet the 'work test'. The work test is satisfied where the taxpayer works at least 40 hours during a consecutive 30-day period each financial year.8
1.15 For the purposes of the ECT, superannuation contributions are generally classified as either concessional or non-concessional contributions. Certain contributions are excluded from these classifications.9 The level of concessional and non-concessional contributions which may be made by a taxpayer in a financial year is capped. Contributions above the relevant caps are subject to tax.10 The nature and limits of the caps, as well as the taxation consequences for exceeding these caps are outlined below.
1.16 Generally, concessional contributions are those made by or for taxpayers to a complying superannuation fund and forms a part of the fund's assessable income.
1.17 Concessional contributions include:11
- compulsory superannuation guarantee (SG) payments made by employers for eligible employees;
- any additional pre-tax superannuation contributions made by employers;
- salary sacrifice payments made into superannuation funds;
- any other amounts made from a taxpayer's pre-tax income to their superannuation fund, such as administration fees or insurance premiums;
- deductible contributions made by self-employed taxpayers;
- notional contributions for members of defined benefit funds;
- some amounts allocated from superannuation fund reserves; and
- before-tax contributions which are split and given to the taxpayer's spouse.
1.18 The relevant contributions caps applicable to concessional contributions based upon the taxpayer's age for the financial years between 2007-08 and 2014-15 are set out in Table 1.
|Income Year||Amount of annual cap||Temporary increased cap for taxpayers
aged 60 or over
on 30 June 2013
|Temporary increased cap for taxpayers
aged 50 or over
on 30 June 2014
Source: ATO, Key Superannuation Rates and Thresholds
1.19 The annual cap applies to taxpayers who are under 50 years of age. In 2007-08, the annual cap was $50,000. It was subsequently halved in 2009-10 and has remained at $25,000 since. From 1 July 2014, the level of the annual cap will be indexed in accordance with average weekly ordinary time earnings in increments of $5,000.
1.20 Different caps applied to taxpayers who were 50 years of age or older. These taxpayers were entitled to contribute up to $100,000 in 2007-08 and 2008-09. This cap was halved to $50,000 in 2009-10 and then halved again to $25,000 in 2012-13. On 5 April 2013, the then Treasurer and Minister for Financial Services and Superannuation jointly announced two temporary concessional contributions cap increases for taxpayers aged 50 and over and 60 and over.12 The temporary cap increases enable taxpayers aged 60 and over to contribute up to $35,000 per year from 1 July 2013 and those aged 50 and over to contribute up to $35,000 from 1 July 2014. The temporary cap increases will not be indexed and will cease once the annual cap reaches $35,000.13 Thereafter, all taxpayers will be subject to the annual cap which will continue to be indexed as discussed above, subject to any further legislative changes.14
1.21 Prior to 1 July 2013, a taxpayer who exceeded the relevant concessional cap outlined above was subject to a tax calculated at 31.5 per cent of the excess amount.15 When combined with the 15 per cent income tax payable by the superannuation fund on these contributions, an effective rate of 46.5 per cent was imposed, which is the highest marginal rate of income tax for taxpayers.
1.22 Following the legislative changes which were enacted in June 2013, taxpayers who exceed their concessional contributions cap will not necessarily be subjected to this high rate of tax. Instead, any excess concessional contributions will be included in the taxpayer's assessable income and taxed at their marginal tax rate.16
1.23 Generally, non-concessional contributions are contributions made by the taxpayer to a complying superannuation fund which does not form part of the fund's assessable income.17 Moreover, taxpayers are generally not able to claim deductions for non-concessional contributions. Examples of non-concessional contributions include:18
- contributions made by an employer on behalf of a taxpayer from the taxpayer's after-tax income;
- contributions made by a taxpayer's spouse (including same-sex spouses) to the taxpayer's superannuation fund, save where the spouse is the taxpayer's employer;
- personal contributions made by the taxpayer and not claimed as a tax deduction;
- contributions in excess of the concessional contributions cap;19
- contributions in excess of a taxpayer's lifetime capital gains tax (CGT) cap which is a small business concession that enables certain contributions made from the disposal of small business assets to be excluded for the purposes of calculating non-concessional contributions;20 and
- most transfers from foreign superannuation funds, except amounts which are included in the superannuation fund's assessable income.
1.24 Excluded from non-concessional contributions are personal injury payments (subject to certain conditions) and contributions which the taxpayer has elected to count towards their CGT cap and which has not exceeded their lifetime limit.21
1.25 There are also caps placed on the amount of non-concessional contributions that may be made before the ECT is applied. As the earnings on assets within the superannuation system may attract concessional rates of income tax, these caps operate to limit the amount of assets that can be shifted into superannuation each year.22
1.26 Table 2 below sets out the non-concessional contributions cap and the CGT cap for the financial years between 2007-08 and 2014-15.
|Income Year||Non-concessional contributions cap||Lifetime CGT cap|
Source: ATO website, Key Superannuation Rates and Thresholds
1.27 Between 10 May 2006 and 30 June 2007, a transitional non-concessional contribution cap enabled taxpayers to contribute up to $1,000,000 in non-concessional contributions without incurring an ECT liability.23
1.28 A 'bring forward' provision is available to taxpayers who are 64 years old or under who exceed their non-concessional contributions cap in a particular financial year. Effectively, it allows them to 'bring forward' the following two years' contributions,24 enabling them to contribute up to $450,000 over a three year period, without incurring an ECT liability.
1.29 For example if, in 2009-10, a taxpayer makes non-concessional contributions of $160,000 (thereby exceeding their non-concessional cap by $10,000), then in the following two years, the taxpayer may contribute up to a total of $290,000 without attracting an ECT liability. If the taxpayer contributes more than $450,000 over this three year period, the excess will be taxed at 46.5 per cent.25
1.30 The 'bring forward' provision is not available to taxpayers who are aged 65 or older.26
Legislative amendments and reforms
Once-only refund offer (2011)
1.31 In May 2011, the Government announced it would enact new laws to provide a once-only option for an eligible taxpayer, who has excess concessional contributions of $10,000 or less in a financial year, to effectively have their excess concessional contributions refunded to them. Under this measure, the individual would be eligible to include 85 per cent of their excess concessional contributions in their assessable income for the corresponding financial year.27 In addition, the taxpayer would also receive a refundable tax offset equal to 15 per cent of the excess contribution which is equivalent to the amount of tax paid by their superannuation fund. It is important to note that such an offer may only be made once, regardless of whether a taxpayer accepts the offer or not.
1.32 Legislation was enacted to give effect to this option and applies to excess concessional contributions for the 2011-12 and 2012-13 financial years.
1.33 To be eligible for this option, in summary, taxpayers must meet the following conditions:28
- the Commissioner determines that the taxpayer has concessional contributions in excess of the cap for the relevant financial year;
- the excess amount is $10,000 or less;
- the taxpayer has not previously made excess concessional contributions from 1 July 2011 onwards; and
- the taxpayer has lodged their income tax return for the relevant financial year within 12 months or such longer period as the Commissioner has allowed for lodgement.
1.34 Where the taxpayer is eligible for the refund, the Commissioner will make the refund offer in writing accompanied by an information sheet which outlines the options available to the taxpayer. The letter of offer and accompanying sheet outlines the two options:
- accept the offer by authorising the superannuation fund to release the excess amounts to the Commissioner; or
- not accept the offer and pay the relevant ECT.
1.35 Offers for refunds commenced issuing to eligible taxpayers in 2012-13 and will continue to be offered in later years until an offer has been made to all eligible taxpayers. The ATO's most recent statistics in this regard are set out in Table 3 below.29
|Offers made in 2012-13 for
|Offers made in 2013-14
(YTD) for 2011-12 breaches
|Offers made in 2013-14
(YTD) for 2012-13 breaches
|Rate of acceptance||29.5%||19%||0.46%|
1.36 These ATO statistics indicate a low rate of acceptance of the refund offers (less than 30 per cent), noting that not all offers have been issued in 2013-14 and that of those offered, the period for election for a large portion have not yet expired.31
1.37 To provide further insight into which taxpayers are more likely to accept the refund offer, the ATO has also provided statistics (as at 8 December 2012) which show the rates of acceptance and rejection stratified by taxpayer income brackets.32 These stratified statistics comprise 9,327 taxpayers with an acceptance rate of 26.94 per cent (or 2,513). The stratified statistics are illustrated in Figure 1 below.
Figure 1: Once-only refund offer acceptance rates by tax bracket
1.38 The data suggests that the highest rates of acceptance are for taxpayers in the lower marginal tax brackets (52.38 per cent and 56.02 per cent for taxpayers with taxable income between $6,000 and $37,000) with taxpayers in the higher marginal tax brackets accepting the offer in fewer instances (17.24 per cent for those with taxable income of more than $180,000). One reason posited for this behaviour may be that those on the highest marginal tax rate would see little or no difference between paying the ECT and having the funds taxed at their marginal rates.
1.39 While this may explain some of the lower acceptance rates, other possible reasons include that those on lower tax rates may be concerned about the impact on their access to other tax concessions if assessable income was increased as a result of this refund. Taxpayers may also not appreciate the nature of the offer, mistakenly believing that they are able to defer it or that it would be offered again if unused in the current year.
1.40 Critically, this refund initiative is only available to the taxpayer for their first excess concessional contribution. Through consultation, it has emerged that some stakeholders are unaware of the once only operation of the refund offer or that it was not possible for the taxpayer to choose the relevant year in which this offer would be accepted.
1.41 While industry associations offered some support for this refund option, there have been ongoing calls for a broadening of the regime.34 Similar sentiments were also echoed in submissions to the IGT's current review.
1.42 The once-only refund option has since been superseded by more extensive reforms enacted by the Government in 2013. However, as the 2013 legislative changes only apply to contributions made on or after 1 July 2013, the once-only refund offer still applies to contributions made between 1 July 2011 and 30 June 2013 (inclusive).
Legislative changes to the treatment of excess concessional contributions (2013)
1.43 On 5 April 2013, the Government announced reforms to the treatment of concessional contributions in excess of the annual cap 'to make it fairer and give individuals greater choice.'35 In announcing the reforms, the then Treasurer and Minister for Financial Services and Superannuation jointly noted:36
Under the current arrangements, concessional contributions that are in excess of the annual cap are effectively taxed at the top marginal tax rate (46.5 per cent) rather than the normal rate of 15 per cent. This outcome is achieved through the imposition of ECT. This is a severe penalty for individuals with income below the top marginal tax rate.
The Government will allow all individuals to withdraw any excess concessional contributions made from 1 July 2013 from their superannuation fund. In addition, the Government will tax excess concessional contributions at the individual's marginal tax rate, plus an interest charge to recognise that the tax on excess contributions is collected later than normal income tax.
These rules will ensure that individuals are taxed on excess concessional contributions in the same way as if they had received that money as salary or wages and had chosen to make a non-concessional contribution.
1.44 Legislation giving effect to these announced reforms applies to contributions made on or after 1 July 2013. For these contributions, where the Commissioner has determined that a taxpayer has exceeded their concessional contributions cap, the taxpayer is notified by receiving an excess concessional contribution determination.37 A taxpayer may object against the determination38 or elect to have up to 85 per cent of their excess concessional contribution released from the superannuation fund (or funds).39
1.45 Where an election is made, the quantum and source of funds to be released is solely at the discretion of the taxpayer40 and those amounts released are treated as non-assessable and non-exempt income.41 However, where an amount less than 85 per cent is elected to be released, the balance of excess concessional contributions will be included in the calculation of excess non-concessional contributions.42 This may, in turn, cause the taxpayer to trigger the 'bring forward' provision discussed earlier and may result in the ECT being raised in respect of excess non-concessional contributions.
1.46 Such an election must be made in an approved form, given to the Commissioner within 21 days of receiving the excess concessional contributions determination or an amended excess concessional contributions determination.43 Taxpayers may seek an extension of time from the Commissioner to make this election.44
Excess concessional contributions charge
1.47 The making of excess concessional contributions, even when fully refunded, may still provide an advantage for taxpayers in two ways. First, unlike salary and wages, excess concessional contributions are not subject to Pay as you go withholding tax. Therefore, the taxpayer is effectively deferring payment of tax due and payable until the ATO identifies that a cap has been exceeded and issues a notice of assessment. Secondly, any earnings from the excess contributions are retained within the superannuation fund and concessionally taxed.45
1.48 Therefore, the excess concessional contributions charge (ECCC) was introduced to:46
...neutralise benefits that taxpayers could otherwise receive from excess concessional contributions, so that they do not receive an advantage in the form of:
- the later time at which tax is collected, as compared to tax that is collected through the Pay as you go system; and
- the earnings on the contributions, which receive a concessional tax rate and remain in superannuation even if the contributions are released under Division 96.
1.49 The ECCC is payable on the amount of tax liability arising from the taxpayer having excess concessional contributions47 and operates similarly to the shortfall interest charge (SIC). Although the Commissioner may exercise discretion to remit SIC, no such discretion exists in relation to ECCC as, unlike SIC or the general interest charge, the ECCC 'applies over a largely fixed period and the actions of the Commissioner do not affect the period over which the [ECCC] is payable or the amount to which the [ECCC] applies.'48
1.50 As the ATO has not yet commenced identifying excess contributions for the 2013-14 year, no ECCC has been applied. As such, the IGT has not reviewed the impact of the charge or the ATO's approach in this regard.
ATO advice and guidance
1.51 As with other areas of tax law, the ATO provides assistance to taxpayers in relation to the ECT through issuing advice and guidance.49 'Advice' is a statement of the Commissioner's opinion of the law which he administers. It is generally issued in the form of a ruling50 and may also include other products such as administratively binding advice.51'Advice' is binding on the Commissioner and provides the highest level of protection for taxpayers against having to pay additional tax, penalties or interest.52
1.52 'Guidance' encompasses a broader range of materials which provide more general information to taxpayers and may include published speeches, consultation forum minutes and media releases.53 'Guidance' is not binding on the Commissioner and may provide protection only against penalties and interest where taxpayers have relied in good faith on 'guidance' which is ultimately found to be incorrect.54
1.53 There are currently a number of sources of ATO guidance in relation to the ECT. These include:
- the ATO's website pages which it promotes through the use of social media on Twitter and Facebook;55
- factsheets;57 and
- media releases.58
1.54 The ATO has also, on occasion, undertaken large targeted mail campaigns to alert potentially affected taxpayers of the changes in the law and the mitigating action they may take. Over the life of the ECT to date, the ATO has undertaken three such campaigns.
1.55 The first occurred in May 2009 when the ATO identified approximately 30,000 taxpayers who made excess contributions in 2007-08 and mailed information to those taxpayers encouraging them to check their data and review any future planned contributions in 2008-09.59
1.56 The second campaign occurred between September and November 2009 when the ATO mailed approximately 287,000 taxpayers who were identified as being at risk of exceeding their concessional contributions cap by reason of the annual cap being halved in the 2009-10 year. The ATO notes that approximately 87 per cent of people contacted by the mail campaign did not exceed their caps.60
1.57 The third campaign focused on some 367,000 taxpayers aged over 50 who were at risk of exceeding their concessional contributions cap by reason of the halving of the contributions cap applicable to them from $50,000 to $25,000 in the 2012-13 year.61
1.58 Furthermore, publications such as the TAXAGENT magazine,62 eLink,63 SuperUpdate64 and SMSF News65 also provide ECT guidance on developments for tax practitioners and SMSF trustees. The ATO has also published an ECT learner's guide to help train financial advisers on various aspects of the ECT regime. This guide was last updated in April 2013 and, as at the date of this report, the IGT notes that the guide had not been further updated to reflect changes to the ECT regime announced in May 2013 and enacted in June 2013.66
1.59 Following the passage of the new law concerning excess concessional contributions, the ATO is currently reviewing its suite of public guidance in relation to the ECT. As at the date of this report, the ATO has advised that these updates are still in draft form pending approval for publication by relevant senior ATO officers.67
How the ATO identifies excess contributions
1.60 The ATO identifies excess contributions by aggregating all contributions data from superannuation funds and first home owners saver account providers for a particular taxpayer and examining deductions claimed in the taxpayer's income tax return to determine whether the taxpayer exceeded either the concessional or non-concessional contributions caps or both.
1.61 The ATO receives contributions data directly from a range of superannuation funds including industry funds, corporate funds and public sector funds as well as those which are regulated by the Australian Prudential Regulations Authority (sometimes referred to as APRA-funds) and Self-Managed Superannuation Funds (SMSFs).
1.62 APRA-funds are required to lodge Member Contribution Statements (MCS) to the Commissioner on an annual basis.68 The MCS is due to be lodged by APRA-funds on 31 October following the end of the financial year.69 Amongst other things, the MCS reports the amount of contributions received in respect of each of the fund's members. Therefore, there may be a 4 to 16 month delay between a contribution being made to an APRA-fund and the ATO being advised of that contribution.
1.63 Similarly, SMSFs are required to lodge with the ATO an Annual Return which, amongst other things, reports to the ATO the amount of contributions received in respect of each of the SMSF's members. SMSF Annual Returns may be required to be lodged by 31 October or up to early June of the following year for certain SMSFs, subject to various conditions.70 Accordingly, there may be a delay of between 4 to 23 months between a contribution being made to an SMSF and the ATO being informed of the contribution.
1.64 Given the law changes outlined earlier, the ATO has adopted a number of different processes for identifying excess contributions and communicating with taxpayers. These are outlined below, and are distinguished between processes for contributions made prior to and those made after 1 July 2013 as well as for taxpayers who are eligible for the once-only refund offer and those who are not.
The ECT end-to-end process — prior to 1 July 2013
1.65 The ATO's broad end-to-end process in relation to excess contributions made before 1 July 2013 is outlined in Figure 2 below. The process differs depending on whether the taxpayer is eligible for the once-only refund offer discussed above.
Figure 2: Excess contributions tax end-to-end process — prior to 1 July 2013
Source: Adapted from ATO information.
Taxpayer is ineligible for once-only refund offer
1.66 If a taxpayer is determined to be ineligible for a refund, a pre-assessment letter is issued to the taxpayer. The pre-assessment letter states that:71
We're writing to let you know that based on our current information you have exceeded at least one of the super contributions caps and you may have to pay excess contributions tax for the <20xx> financial year.
We've determined you've exceeded a cap by using:
- the information sent to us by your super fund/s and first home saver account provider if relevant
- any personal super deduction amount you were allowed in your income tax return, and
- your date of birth.
1.67 The letter also outlines the total amount of concessional and non-concessional contributions made by the taxpayer, the contributions caps applicable to the taxpayer and the corresponding quantum of any excess contributions. Although totals are provided, these are not broken up by the superannuation funds to which they relate.72
1.68 The pre-assessment letter also gives the taxpayer an opportunity to provide the ATO with information to correct the contribution details presented in the letter. The pre-assessment letter notes:73
What you need to do
If the information in this letter is incorrect, you will need to phone us within 28 days of the date of this letter and let us know what action you will be taking.
To correct the information, you'll need to:
- Contact your super fund/s or first home saver account provider if you believe that the contributions reported are wrong so they can provide us with corrected information
- Lodge your income tax return if you intend to claim a personal super deduction
- Amend your income tax return if it has the wrong personal super deduction amount.
1.69 If the taxpayer does not make contact with the ATO to verify the information in the pre-assessment letter within 28 days, the ATO will automatically assess their ECT tax liability and issue the taxpayer with a Notice of Assessment (NOA) for the amount of ECT payable.
1.70 The NOA is issued together with a Release Authority (RA). The RA enables taxpayers to withdraw monies from the superannuation fund for the purposes of paying the ECT. If the taxpayer elects to withdraw money from their superannuation fund to pay their ECT, they are required to send the RA to their superannuation fund so that it may forward the ECT payment to the ATO. The taxpayer may elect to either have the withdrawn amount paid to them or paid directly to the ATO.74
1.71 If the assessment relates only to excess concessional contributions, then a voluntary RA is issued. The voluntary RA is valid for 90 days after the issue date and cannot be reissued after this time. If the authority is not sent within 90 days, the fund will not be able to withdraw the requested amount. It is compulsory for the superannuation fund to complete and return the RA statement to the ATO as it confirms that the superannuation fund has released the taxpayer's money according to the RA.
1.72 However, if the assessment relates to, or includes, excess non-concessional contributions then the taxpayer is issued with a compulsory RA. The compulsory RA must be returned by the taxpayer to the superannuation fund within 21 days. As such, and unlike excess concessional contributions, the taxpayer must withdraw part of their excess non-concessional contribution to pay the ECT. Where the taxpayer fails to return a compulsory RA, the ATO may impose penalties on the taxpayer.75
Taxpayer is eligible for once-only refund offer
1.73 As stated earlier, where the ATO has determined that the taxpayer is eligible for the once-only refund offer, the ATO will issue a refund offer and the taxpayer may elect to either accept or refuse that offer.
1.74 If the refund offer is refused or there is no response to the offer after 28 days, the ATO will issue an assessment for ECT liability together with a voluntary RA, and thereon follow the same process as discussed above.
1.75 However, if the taxpayer elects to accept the refund offer, the taxpayer must return the election form to the ATO. The ATO then directs the relevant superannuation fund or funds to pay to it 85 per cent of the amount of the excess concessional contribution.
1.76 The ATO will then amend the taxpayer's individual income tax assessment to include the excess concessional contributions as assessable income which is taxed at the taxpayer's marginal tax rate. The taxpayer is also afforded a 15 per cent refundable tax offset to account for the tax already paid by the superannuation fund.
1.77 Lastly, the ATO will forward the residual payment, Notice of Amended Assessment (NOAA) and Statement of Account (SOA) to the taxpayer. The amount released by the taxpayer's superannuation fund, or funds, is treated as a non-assessable, non-exempt benefit to the taxpayer.
The ECT end-to-end process — after 1 July 2013
1.78 Following the enactment of legislation on the treatment of excess concessional contributions made on or after 1 July 2013 as well as the introduction of the ECCC, the ATO has updated its end-to-end process. This new process is outlined in Figure 3 below.
Figure 3: Excess concessional contributions end-to-end process — after 1 July 2013
Source: Adapted from ATO information.
1.79 Under the new law, where taxpayers are identified to have made excess concessional contributions, the amount of the excess is included in the taxpayer's assessable income and taxed at their marginal tax rate. The taxpayer also receives a 15 per cent non-refundable tax offset. The ATO then issues the taxpayer with an NOA (or an NOAA if the taxpayer had been previously assessed for income tax for that financial year), an ECT determination and an SOA. An ECT determination letter which accompanies these documents includes information in relation to:76
- the quantum of their excess concessional contribution;
- the amount of tax payable as a result of its inclusion in assessable income;
- the amount of the excess concessional contributions charge that is payable;
- the option to withdraw the excess concessional contribution; and
- the consequences of not choosing to withdraw, being its inclusion in non-concessional contributions cap which may result in excess non-concessional contributions and tax of 46.5 per cent.
1.80 The taxpayer is also provided with an election form which enables them to elect to withdraw up to 85 per cent of their excess concessional contribution from their superannuation fund. If the taxpayer does not wish to withdraw that amount, then the taxpayer is required to make payment of the assessed income tax liability.
1.81 If the taxpayer elects to withdraw any amount of their excess concessional contribution, the superannuation fund forwards the sum to the ATO. That sum is credited against the assessed income tax liability and any other liabilities to the Commonwealth and the balance is refunded to the taxpayer.
1.82 If the taxpayer elects to withdraw any amount of their excess concessional contributions, this amount is disregarded for the purposes of calculating any excess non-concessional contributions. If the taxpayer elects not to withdraw any of their excess concessional contribution, then it is taken into account when calculating any excess non-concessional contributions and may trigger the 'bring forward' provision.
1.83 The legislation enacted in 2013 does not impact the ATO's current processes where the taxpayer only has excess non-concessional contributions. Where this is the case, the ATO will issue a pre-assessment letter to the taxpayer and follow the process outlined earlier in Figure 2.
Challenging ECT assessments and determinations
1.84 Taxpayers may seek to challenge ECT assessments or determinations in a number of ways. ECT assessments are issued to taxpayers who have an ECT liability arising from either excess concessional or non-concessional contributions prior to 1 July 2013. From 1 July 2013 onwards, taxpayers will be issued with an ECT determination where they have made excess concessional contributions. ECT assessments will continue to be used in respect of ECT liabilities arising from excess non-concessional contributions after 1 July 2013.
1.85 Outlined below are each of the avenues which may be pursued by taxpayers. As the ATO has not yet commenced issuing ECT determinations, references below are to ECT assessments only. However, for practical purposes, the avenues are equally applicable to ECT determinations.
Where taxpayers disagree with reported fund information
1.86 Where the taxpayer considers that the information reported by their superannuation fund, and on which the ATO has relied, is incorrect, the taxpayer may seek to address the error directly with the fund. In doing so, the taxpayer will generally seek to have the fund correct the error and re-report the information to the ATO.77
1.87 The ATO notes that where the fund corrects such information, the ATO will consider this updated information in either amending the taxpayer's ECT assessment or reconsider whether the taxpayer may be entitled to the once-only refund offer discussed earlier.78
1.88 If a taxpayer is dissatisfied with the fund's management of their matter, they may formally complain to the trustee of the superannuation fund or the Superannuation Complaints Tribunal if the fund is APRA-regulated, in certain circumstances.79
Where taxpayers disagree with income tax information
1.89 In some cases, income tax lodgement and assessment information may also result in an ECT assessment. One such example is where taxpayers make personal contributions, intending to claim these as deductions on their income tax return which would therefore render the contributions concessional. If the taxpayer in this situation claims an incorrect amount by way of deduction, or claims the deduction at the wrong label, the contribution may be considered non-concessional, leading to the taxpayer exceeding the relevant cap and an ECT assessment being issued.
1.90 Where this occurs, it is open to the taxpayer to request an amendment to their income tax return to claim the correct deduction amount at the right label. This amended information is considered by the ATO and the ECT assessment is amended accordingly, or the taxpayer's entitlement to the once-only refund offer is reassessed.80
Objections and litigation in relation to ECT assessments
1.91 An ECT assessment or determination may also be challenged through the usual processes of objection, followed by review or appeal to the Administrative Appeals Tribunal (AAT, including the Small Taxation Claims Tribunal (SCTC)) or the Federal Court of Australia (Federal Court), as set out in Part IVC of the TAA 1953.81
1.92 While taxpayers may choose to challenge the substantive basis of an ECT assessment, this right is not often exercised. Statistics provided to the IGT indicate that, as at March 2013, the ATO had only received and finalised 176 such objections.82 Of these, 77 were allowed in full (43.75 per cent), 5 were allowed in part (2.84 per cent) and 94 were disallowed (53.41 per cent).83
1.93 The proportion of objections to ECT assessments which proceed to the AAT or the Federal Court represent a relatively small fraction of all disputes concerning the ECT. Since the inception of the ECT regime, the ATO records show that there have only been 31 such matters.84 Of these:
- five were heard and determined by the AAT in favour of the Commissioner;85
- eight were withdrawn or conceded by either or both the Commissioner and the taxpayer;
- five were in progress at the time the ATO provided the information;
- twelve were settled by agreement between the taxpayer and the Commissioner;86 and
- one matter was an appeal to the Federal Court of an AAT decision which was ultimately decided in the Commissioner's favour.87
1.94 Table 4 sets out the original amount in dispute, the outcome of the matter and the quantum and percentage of any variance in these 31 cases.88
|Case||Amount in Dispute||Outcome||Quantum of reversal||Proportion of reversal|
|4||$117,691.50||Favourable to ATO||N/A||N/A|
|5||$86,867.30||Favourable to ATO||N/A||N/A|
|6||$150,000.00||Favourable to ATO||N/A||N/A|
|8||$46,500.00||Agreement||$46,500 + $1,681.72||103.62%|
|11||$86,867.30||Favourable to ATO||N/A||N/A|
|18||$2,659.98||Favourable to ATO||N/A||N/A|
|21||$12,826.63||Favourable to ATO||N/A||N/A|
1.95 As can be seen from Table 4, while many cases are either withdrawn by the taxpayer or found in favour of the Commissioner, where taxpayers and the ATO reach agreement, the variance of the original disputed amount can be significant. In all but one case (Case 24), the variance exceeded 50 per cent and was generally closer to 100 per cent which represents a complete reversal of the liability that was originally raised. The ATO has advised that the vast majority of these agreements involved either the taxpayer or their advisers providing the ATO with further information or the taxpayer's superannuation fund re-reporting updated contributions information.
Seeking an exercise of the Commissioner's discretion
1.96 The law provides the Commissioner with a discretion to disregard or reallocate to another year all or part of a taxpayer's concessional or non-concessional contributions where there are special circumstances and where the exercise of such discretion is consistent with the objects of the relevant law.90 This discretionary power is contained in section 291-465 of the ITAA 1997 in respect of excess concessional contributions and section 292-465 of the ITAA 1997 in relation to excess non-concessional contributions. Section 291-465 was enacted as part of the Government's 2013 reforms. The text of section 291-465 is materially similar, though not identical, to that of section 292-465.
1.97 All applications for the exercise of this discretion are initiated by an application by the taxpayer.91 Each application is considered by an ATO officer who undertakes research and makes a recommendation to an approving officer regarding whether the Commissioner should exercise discretion to disregard or reallocate the excess contribution. Where the recommendation is approved, a written decision together with reasons for that decision are issued to the taxpayer.
1.98 Where the application concerns contributions made to a defined benefit fund, involves CGT issues or where the case officer and approving officer consider the application to be difficult or complex, that application may be escalated to a complex advice team. The complex advice team undertakes relevant research and makes a recommendation to an officer at the Executive Level 1 classification for approval. Once the recommendation is approved, a written decision with reasons is issued to the taxpayer.
1.99 If the application contains novel elements or issues, it is escalated to an 'ECT dedicated workshop' which includes officers at the Executive Level 2 classification, for advice. The workshop reviews the matter and provides relevant advice to the case officer and approving officer who then action and finalise the advice. Once finalised, the decision is circulated to relevant ATO staff to ensure consistency of future decisions on materially similar issues.
1.100 ATO senior officers may also become involved in discretion applications where such involvement is warranted.
1.101 This overall process is outlined in Figure 4 below.
Figure 4: The Commissioner's discretion end-to-end process
Source: Adapted from ATO information. An A4 version of this diagram is provided in Appendix 2.
1.102 ATO officers who are involved in managing discretion applications are required to adhere to Law Administration Practice Statement PSLA 2008/1 (PSLA 2008/1).92 Relevantly, PSLA 2008/1 provides:93
4. It is not possible to anticipate all the circumstances in which the discretion may or may not be exercised. In each case the decision maker (that is, the Commissioner or a person delegated or authorised to exercise the Commissioner's discretion) must consider the particular circumstances of the case and the relevant individual. However, regard should be had to the principles and examples set out in the Explanation section of this practice statement and to guidance the ATO publishes to its website. In applying those principles to an individual's circumstances, a decision maker should be satisfied that the relevant circumstances are special in the sense that they are unusual or different that take the matter out of the ordinary course of events. In the context of this discretion, it is highly relevant whether imposing the excess contributions tax would therefore be unjust, unreasonable or otherwise inappropriate.
5. In addition, this discretion must be exercised consistently with the object of Division 292 which is to ensure that the amount of concessionally taxed superannuation benefits a person receives results from contributions that have been made gradually over the course of the person's life. That object must be understood in light of the explanation in the Guide to the superannuation contributions phase provisions as a whole, explaining that there are limits on contributions that receive favourable tax treatment. Those limits seek to restrict concessional contributions made for a person each financial year and seek to restrict non-concessional contributions made for a person each financial year or over a three-year period.
6. The exercise of the discretion must not be approached in a rigid or inflexible way. In forming an opinion, administrative law principles must be observed. Each case has to be considered on its merits after having proper regard to all the relevant facts. Decision makers must not take into account irrelevant considerations and must exercise their own judgment in making an appropriate and reasoned decision. The decision to exercise the discretion should be made in good faith and without bias and must not be made at the direction of another person.
1.103 PSLA 2008/1 also outlines those factors which need to be considered by ATO officers exercising the discretion,94 those circumstances which would not generally qualify for exercise of the discretion95 and a series of illustrative examples.96
1.104 Taxpayers who are dissatisfied with the discretion decision may lodge a formal objection against the decision and exercise further review and appeal rights to the AAT or the Federal Court.97 Further discussion on objections and litigation in relation to discretion decisions are set out in Chapter 2.
1 Inspector-General of Taxation (IGT), Review into the Australian Taxation Office's compliance approach to individual taxpayers — Income tax refund integrity program, 21 February 2014.
2 IGT, Review into the Australian Taxation Office's compliance approach to individual taxpayers — use of data matching, 21 February 2014.
3 Peter Costello MP, 'A Plan to Simplify and Streamline Superannuation' (Press Release, No. 042, 9 May 2006).
4 Tax Laws Amendment (Simplified Superannuation) Act 2007; Income Tax Assessment Act 1997 (ITAA 1997), div 292.
5 Australian Taxation Office (ATO), Income tax: superannuation contributions, TR 2010/1, para .
6 Above n 5, para .
7 ibid, para .
8 Superannuation Industry (Supervision) Regulations 1994, reg 7.01(3).
9 For example, government co-contribution payments and contributions made to a constitutionally protected fund.
10 ITAA 1997, ss 291-15, 292-15, 292-80.
11 ATO, Super contributions — too much super can mean extra tax (7 February 2014).
12 Wayne Swan MP and Bill Shorten MP, 'Reforms to make the superannuation system fairer' (Joint Media Release, No. 020, 5 April 2013).
13 ATO, Key superannuation rates and thresholds (21 February 2014).
14 ITAA 1997, ss 960-265, 960-285; above n 13.
15 Superannuation (Excess Concessional Contributions Tax) Act 2007, s 5; ITAA 1997, div 292.
16 Above n 12; ITAA 1997, div 291.
17 ATO, Non-concessional (after-tax) contributions (2 August 2013).
18 Above n 11.
19 From 1 July 2013, only excess concessional contributions which are not refunded to the taxpayer will be included in the calculation of excess non-concessional contributions.
20 Above n 13.
21 ITAA 1997, ss 292-95, 292-100 and 292-105; above n 11; for these contributions to be exempt from the non-concessional contributions caps, certain conditions must be met including the lodgement of relevant election forms by the taxpayer.
22 ITAA 1997, s 292-5.
23 ATO, Key superannuation rates and thresholds (9 January 2014).
24 ITAA 1997, s 292-85.
25 Above n 11.
26 ITAA 1997, para 292-85(3)(b).
27 ITAA 1997, s 292-467; Bill Shorten MP, 'Superannuation — Reform of Excess Contribution Regime Gives Australians New Powers to Request Refunds' (Media Release, 10 May 2011).
28 ITAA 1997, paras 292-467(1)(a)-(d).
29 ATO communication to the IGT, 1 November 2013.
30 ATO communication to the IGT, 1 November 2013.
32 As annual return lodgements for SMSFs are not yet due, it is not yet possible for the ATO to identify all taxpayers eligible for this refund option.
33 ATO communication to the IGT, 25 February 2013.
34 SMSF Professionals' Association of Australia, 'Excess concessional contributions refunding not enough, says SPAA', (Media release, 22 December 2011); Australian Institute of Superannuation Trustees, Submission to the Treasury, Refund of excess concessional contributions, January 2012, p 2.
35 Above n 12.
37 Taxation Administration Act 1953 (TAA 1953), sch 1 div 97.
38 TAA 1953, sch 1 s 97-10; TAA 1953, pt IVC.
39 TAA 1953, sch 1 div 96.
40 Explanatory Memorandum, House of Representatives, Tax Laws Amendment (Fairer Taxation of Excess Concessional Contributions) Bill 2013, p 16-17.
41 ibid, p 16.
42 ibid, p 20.
43 TAA 1953, sch 1 para 96-5(4)(a) and sub-para 96-5(4)(b)(i).
44 TAA 1953, sch 1 sub-para 96-5(4)(b)(ii).
45 Above n 40, p 11.
46 Above n 40; TAA 1953, sch 1 s 95-5.
47 Explanatory Memorandum, House of Representatives, Superannuation (Excess Concessional Contributions Charge) Bill 2013, p 12; Sections 4 and 5 of the Superannuation (Excess Concessional Contributions Charge) Act 2013.
48 Explanatory Memorandum, above n 47, p 13.
49 ATO, Provision of advice and guidance by the Australian Taxation Office, PSLA 2008/3, 20 February 2014.
50 TAA 1953, sch 1 divs 357, 358 and 359.
51 Above n 49, para .
52 ibid, para .
53 ibid, paras ,  and .
54 ibid, paras  and .
55 Above n 11.
56 ATO, NAT11032: Running a self-managed super fund, November 2013.
57 ATO, Super: your money your future (21 February 2013).
58 See for example, ATO, 'Contributions to superannuation funds under scrutiny' (Media Release, 2008/30, 13 June 2008).
59 ATO communication to the IGT, 6 March 2013, p 1.
62 For example, Edition 54, March 2012, Edition 55, June 2012, Edition 56, September 2012.
63 For example, September 2011, November 2011, January 2012, July 2012 and September 2012 editions.
64 For example, September 2011, December 2011 and September 2012 editions.
65 For example, June 2012 and August 2012 editions.
66 ATO, ECT Learner's Guide (22 November 2013).
67 ATO communication to the IGT, 23 October 2013.
68 TAA 1953, sch 1 sub-div 390A.
69 ATO, APRA-regulated funds reporting and lodgment dates (4 October 2012).
70 ATO, Key lodgement dates for SMSFs (5 March 2014).
71 ATO, Template pre-assessment letter, December 2012.
74 ATO, NAT71777: Voluntary Release Authority (8 January 2013).
75 ATO, NAT71429: Compulsory Release Authority (8 January 2013).
76 ATO communication to the IGT, 23 October 2013.
77 Above n 11.
81 ITAA 1997, ss 291-245 and 292-245.
82 ATO communication to the IGT, 14 February 2014.
85 Player and Commissioner of Taxation  AATA 35; The Taxpayer and Commissioner of Taxation  AATA 168; Rinaldo and Commissioner of Taxation  AATA 839; Strasser and Commissioner of Taxation  AATA 33; Colless and Commissioner of Taxation  AATA 441.
86 An agreement pursuant to section 42C of the Administrative Appeals Tribunal Act 1975.
87 Player v Commissioner of Taxation  FCA 869.
88 In addition to these 31 cases, the ATO's records show one further litigated matter in which the taxpayer disputed a penalty which was imposed for failure to return a compulsory RA. This matter was resolved by agreement.
89 ATO communication to the IGT, 7 February 2014.
90 ITAA 1997, ss 291-465 and 292-465.
91 ITAA 1997, sub-ss 291-465(1) and 292-465(1).
92 ATO, The Commissioner's discretion to disregard or reallocate concessional and non-concessional contributions for a financial year, PSLA 2008/1, 8 February 2012 (PSLA 2008/1); ATO, Law Administration Practice Statements, 1998/1, 19 December 2013, para .
93 PSLA 2008/1, paras -.
94 ibid, paras -.
95 ibid, paras -.
96 ibid, paras -.
97 ITAA 1997, sub-s 291-465(7); ITAA 1997, s 292-245.