2.1 Stakeholders raised a number of concerns in relation to the structure of the ECT, including whether:
- the ECT regime is operating as intended;
- the ECT imposes a disproportionate impact on taxpayers; and
- clauses in superannuation fund trust deeds, which purport to limit the amount of contributions and to refund any excess contributions made (contribution limiting clauses), are effective.
Whether the ECT regime is operating as intended
2.2 Stakeholders argue that the ECT regime is:
- not operating as intended as far more taxpayers have been taxed under the ECT regime than was originally envisaged with the ATO issuing assessments totalling $563m98 for a regime that was not expected to raise any revenue;99 and
- punitive in nature, as reflected in comments made by Government ministers,100 the judiciary,101 the media102 as well as industry and professional bodies, particularly in instances where it can effectively levy taxes as high as 93 per cent.103
2.3 As a result, concerns have been expressed that the most significant and immediate impact of the ECT is on taxpayers who alone bear the risk of a large portion of their retirement savings being paid towards the tax imposed. For taxpayers who are nearing retirement, it is particularly stressful as such payments are not easily supplemented. They run the risk of having insufficient funds for retirement and need to draw on Government assistance for retirement income.
2.4 Stakeholders also observed that significant costs may be incurred by taxpayers in retaining advisers and legal representatives to assist them in making contributions decisions and dealing with the ATO where they may be liable for the ECT. Examples of the level of costs raised with the IGT range from $15,000 to $40,000, accounting for between a quarter to one-half of the total ECT which was being challenged in those particular cases. Stakeholders have also expressed concern that reliance on tax agent or other professional advice affords taxpayers no protection against the ECT where such advice ultimately is incorrect, incomplete or otherwise leads to an ECT liability.
How many taxpayers affected?
2.5 Table 5 sets out the number of ECT assessments the ATO has issued since the ECT regime commenced operation on 1 July 2007. As with earlier statistics, the ATO has advised that in respect of 2010-11, the ATO has not finalised the relevant assessments and in relation to 2011-12, all assessments have not yet issued. As such, the data below should be taken to be indicative only and not determinative of figures for those years.
|Type of Assessments||Transitional||2007-08||2008-09||2009-10||2010-11||2011-12|
|Excess concessional contributions only||N/A||18,246||15,868||50,049||35,999||10|
|Excess non-concessional contributions only||1,784||1,664||1,586||1,940||970||0|
|Both excess concessional and non-concessional contributions||N/A||427||421||709||206||0|
2.6 Table 5 above indicates that there was a significant increase in the number of taxpayers exceeding the concessional contributions cap in 2009-10 with 50,049 assessments issued compared with 15,868 issued in 2008-09. This increase is likely attributable to the reduction of the concessional contributions cap from $50,000 to $25,000 between these years. While the data for 2010-11 is incomplete, it is more than double the number of assessments issued in 2008-09. The difference between the numbers of taxpayers exceeding their concessional cap in 2009-10 and 2010-11 suggests that while more taxpayers were aware of the reduced concessional contributions cap, it was nonetheless a main cause of ECT assessments in 2010-11.
2.7 The numbers of excess non-concessional contributions remained relatively stable between 2007-08 (1,664 assessments) and 2009-10 (1,940 assessments). Over this period, no changes were made to the non-concessional contributions cap.
Which taxpayers are affected?
2.8 The ATO has provided statistics on the demographics of taxpayers who have exceeded the concessional and non-concessional contributions caps and the impacts of the ECT stratified by income brackets over a three year period from 2007-08 to 2009-10. These statistics are set out in Table 6 and Table 7 below.
|Taxable income range ($)||2007-08||2008-09||2009-10|
|ITR not lodged||8||513||246||12||904||348||117||17,403||1,184|
|0 — 50,000||180||4,715||2,106||160||4,259||2,626||78||4,610||1,480|
|50,001 — 100,000||157||8,024||588||219||7,103||844||44||9,291||182|
|100,001 — 150,000||92||4,650||225||91||4,205||253||28||6,224||107|
|150,001 — 200,000||48||3,177||87||67||3,068||188||78||10,638||490|
2.9 Table 6 shows that across three years, taxpayers who exceeded their concessional caps tended to be on higher taxable income ranges. Indeed, according to the above, those in the 'over $200,000' category comprised the largest proportion of such taxpayers. In contrast, the largest proportion of taxpayers who exceeded their non-concessional caps were within the $0 to $50,000 taxable income range, i.e., 54.8, 52.2 and 39.2 per cent of such taxpayers exceeded the non-concessional cap in the 2007-08, 2008-09 and 2009-10 financial years, respectively. Statistics provided by the ATO for the 2010-11 and 2011-12 financial years also indicate that the largest proportion of taxpayers exceeding their non-concessional caps were those within the lowest taxable income range.106
2.10 It should be noted that the numbers of taxpayers exceeding their caps in Table 6 is not directly reconcilable with the numbers of ECT assessments issued in Table 5. This is due to the ATO not issuing ECT assessments to taxpayers whose excess contributions are below a certain pre-set threshold. The ATO's approach in this regard is discussed in detail in Chapter 3.
|Taxable income range ($)||2007-08||2008-09||2009-10|
|ITR not lodged||1.22%||0.91%||4.04%||0.22%||1.05%||4.48%||1.76%||17.08%||10.33%|
|0 — 50,000||7.10%||6.50%||22.40%||6.37%||6.90%||23.06%||1.62%||4.17%||12.42%|
|50,001 — 100,000||4.30%||8.78%||6.49%||0.57%||4.27%||2.37%||11.30%||6.66%||3.51%|
|100,001 — 150,000||1.50%||5.29%||2.65%||1.06%||3.14%||1.95%||0.17%||5.57%||1.45%|
|150,001 — 200,000||0.50%||3.75%||1.36%||5.40%||8.01%||8.81%||0.19%||4.24%||1.02%|
2.11 Table 7 shows that for both the 2007-08 and 2008-09 financial years, the largest proportion of annual ECT liability was imposed in relation to the non-concessional cap, being exceeded, i.e., 42.7 and 47.6 per cent respectively. In 2009-10, the proportion of ECT liability imposed on excess non-concessional contributions reduced to 31.45 per cent.
2.12 It should be noted that, across all three years, taxpayers in the lowest taxable income range comprised the largest proportion of ECT liability for excess non-concessional contributions. In each of the 2007-08, 2008-09 and 2009-10 financial years the ATO's statistics show that 52.5, 48.4 and 39.5 per cent of ECT liabilities for exceeding the non-concessional cap were imposed on taxpayers who had less than $50,000 of taxable income.
2.13 Relevantly, the ATO's statistics also indicate that in the 2007-08 and 2008-09 financial years, approximately half of total ECT liabilities were imposed on taxpayers who only contributed to APRA-funds.108 The proportion for later years cannot be accurately determined due to extended timeframes for SMSFs to report contributions.
How much revenue has the ECT raised?
2.14 Table 8 sets out the total value of assessments issued across a number of years where taxpayers exceed their concessional contributions, non-concessional contributions or both caps.
|Type of Assessments||Transitional||2007-08||2008-09||2009-10||2010-11||2011-12|
|Excess concessional contributions only||N/A||72.0||57.2||141.8||96.1||0.1|
|Excess non-concessional contributions only||49.2||35.3||27.8||39.3||18.6||0|
|Both excess concessional and non-concessional contributions||N/A||6.8||5.8||8.3||2.2||0|
2.15 Similar to the trends observed in the numbers of ECT assessments issued, the total values of these assessments also increased between 2008-09 and 2009-10, presumably, as a result of the decreasing concessional contributions cap. Moreover, while the data for 2010-11 is incomplete, on the figures that are available, the value of assessments of $96.1m for excess concessional contributions in that year were higher than those in 2007-08 and 2008-09.
2.16 The value of assessments in respect of excess non-concessional contributions remained largely consistent, with a small decrease in 2008-09 and a larger decrease in 2010-11 in line with the reduction in the number of assessments issued.
Average ECT liability per taxpayer
2.17 Statistics published by the ATO in relation to the average and median values of ECT assessments provide some insight on the financial impacts which taxpayers may encounter when issued with ECT assessments. The average and median values are set out in Table 9 and Table 10. While the statistics are current as at 1 January 2013, the ATO has advised that it has not finalised the relevant assessments for 2010-11 and in relation to 2011-12, all assessments are yet to issue.
|Type of Assessments||Transitional||2007-08||2008-09||2009-10||2010-11||2011-12|
|Excess concessional contributions only||N/A||3,944||3,607||2,833||2,668||1,363|
|Excess non-concessional contributions only||27,606||21,192||17,502||20,268||19,223||N/A|
|Both excess concessional and non-concessional contributions||N/A||15,969||13,781||11,664||10,788||N/A|
|Type of Assessments||Transitional||2007-08||2008-09||2009-10||2010-11||2011-12|
|Excess concessional contributions only||N/A||1,789||1,774||1,594||1,528||1,138|
|Excess non-concessional contributions only||9,300||5,439||5,087||4,760||5,876||N/A|
|Both excess concessional and non-concessional contributions||N/A||3,555||4,172||4,153||2,557||N/A|
2.18 The data in Table 9 shows a steadily declining average for excess concessional contribution ECT assessments from $3,944 in 2007-08 to $2,838 in 2010-11, strongly suggesting that taxpayers have become more conscious of their obligations in respect of concessional contributions.
2.19 The median values for excess concessional contribution ECT assessments have remained relatively consistent ranging from $1,789 in 2007-08 to $1,528 in 2010-11. In contrast, the values for excess non-concessional contribution ECT assessments are consistently higher than the rates for excess concessional contribution ECT assessments by reason of the higher rate of tax applied and indicative of the higher amounts by which taxpayers exceed their non-concessional contributions caps.
2.20 As shown in Table 9, across all financial years between 2007-08 and 2010-11, the average excess non-concessional contribution ECT assessment was close to $20,000 with a small reduction being observed ($17,502) in 2008-09. During the transitional year, the average excess non-concessional contribution ECT assessment was $27,606.
2.21 The median values for non-concessional contribution ECT assessments are much lower than the average values. In 2007-08, the median was $5,439 which reduced to $5,087 and $4,760 in the following two financial years before increasing again to $5,876 in 2010-11. The transitional median value for excess non-concessional contribution ECT assessments was $9,300.
2.22 The large difference between the average and median values for ECT assessments relating to non-concessional contributions indicates that where taxpayers exceed their non-concessional contributions caps, they did so by wide-varying amounts which has resulted in a large spread of the amount of tax levied in these ECT assessments. It also illustrates that a large proportion of taxpayers exceed their non-concessional contributions by a low amount.
2.23 The perceptions that the ECT is not operating as intended and not achieving the stated objectives of ensuring that taxpayers save for their retirement throughout the course of their working lives arise from the great number of taxpayers that have been liable for the ECT and the significant amounts of revenue that have been raised where none had been expected.112 This view is exacerbated by reports of taxpayers being subject to taxes at rates of 93 per cent.113
2.24 In May 2008, following a pilot to determine the numbers of taxpayers who had potentially exceeded the transitional contributions cap, the ATO identified that the number of affected taxpayers was much higher than original estimates. Following this observation, the ATO provided relevant briefings to the Minister for Superannuation and Corporate Law.114 The Minister noted the ATO's advice on this point.
2.25 The ATO has since provided further Minutes to both the Department of Treasury and the relevant Government Minister on different aspects of the ECT including effective tax rates, the exercise of the Commissioner's discretion and the numbers of assessments issued and expected to issue to taxpayers.115 The IGT considers that the dialogue between the ATO, Treasury and Government highlights the importance of continuing to inform Government of the impact of policy measures so that any corrective measures may be quickly formulated.
2.26 In 2013 the law was changed to effectively tax excess concessional contributions at the taxpayer's marginal tax rate and provide taxpayers with an accompanying option to withdraw up to 85 per cent of their excess concessional contributions. External stakeholders have commented that this change better aligns the treatment of excess concessional contributions with the policy intent of the legislation,116 as it effectively seeks to restore both the taxpayer and the revenue to the position they would be in if no excess concessional contribution had been made.
2.27 In the IGT's view, this law change should alleviate some of the concerns raised in this IGT review, particularly those relating to the treatment of excess concessional contributions. However, it does not address concerns that the treatment of excess non-concessional contributions disproportionately treats taxpayers, especially low income earners who are liable to pay the top marginal rate on those contributions. This is exacerbated by the fact that non-concessional contributions are generally made from funds which have already been subject to income tax.117
2.28 An alternative, in Treasury's original proposal for the treatment of undeducted contributions (i.e., non-concessional contributions), was that 'contributions in excess of the cap would be returned to the individual' and 'any earnings on the excess would be effectively taxed at the top marginal tax rate.'118 However, there were a number of practical difficulties associated with this alternative, including the additional compliance and administrative costs involved. In particular, stakeholders were concerned about difficulties associated with calculating actual superannuation funds' earnings on those excess contributions given the diversity of ways in which funds derive earnings as well as the difficulties in identifying appropriate liquid sources of funds from which refunds may be made.
2.29 Moreover, it was noted that any rule which sought to provide a proxy for actual earnings would likely result in some taxpayers gaining an advantage while others being unduly disadvantaged.
2.30 In the IGT's view, there is a need for a mechanism to discourage taxpayers from using the concessional treatment of superannuation earnings unduly. However, such a mechanism should not disproportionately penalise taxpayers.
2.31 In this respect, the IGT notes that according to the ATO's statistics set out above, low income taxpayers comprise approximately half of those who exceed the non-concessional contributions cap. This group of taxpayers may be the least able to absorb the ECT without it substantially affecting their future retirement income.
2.32 Accordingly, the IGT is of the view that the Government should consider whether the current ECT regime provides proportional treatment of excess non-concessional contributions. As the imposition of any resulting compliance and regulatory impacts should be minimised, the IGT considers that there would be significant benefit in undertaking broad community consultation in this respect.
The IGT recommends that the Government consider whether the ECT regime provides an appropriate treatment for excess non-concessional contributions, particularly in relation to low income taxpayers, with the aim of minimising the adverse impacts by such means as:
- refunding excess contributions;
- a charge to neutralise any benefits on concessionally-taxed earnings from those contributions; and
- a deterrent factor that is commensurate with the targeted taxpayer action.
This is a matter for Government.
Whether the ECT imposes a disproportionate impact on taxpayers
2.33 Stakeholders expressed concern that the ECT imposed a disproportionate impact due to a combination of:
- onerous monitoring burden placed on taxpayers;
- substantial delays in identifying when contribution caps have been exceeded;
- insufficient protection afforded to taxpayers for genuine mistakes, matters beyond their control or incorrect advice; and
- insufficient scope of discretion afforded to the Commissioner to address any disproportionate impact of the ECT.
Monitoring burden imposed on taxpayers
2.34 Stakeholders observed that the ECT regime effectively imposes a burden solely on taxpayers to monitor and maintain their contributions below the contributions caps despite the fact that the process of contributing, receiving, allocating and reporting superannuation information rests with a number of other parties including employers, tax and financial advisers and superannuation funds.
2.35 This monitoring burden assumes that taxpayers and their advisers are able to easily and accurately obtain information to quantify the levels of contributions already made, how much more may be made and the potential for any ECT liability where the relevant contributions caps are exceeded. However, taxpayers and their advisers may not always have ready access to this information and issues may arise where:
- taxpayers who are members of multiple funds are not aware of the need to aggregate all contributions made to all funds;
- taxpayers are not aware of certain types of employer contributions which have been made on their behalf, such as insurance contributions;
- taxpayers and their advisers do not possess a reasonably sophisticated level of superannuation and ECT knowledge to ask the right questions in order to obtain accurate and complete information such as questions regarding timing, allocation and the nature and source of contributions; and
- employers and superannuation funds are not aware of other contributions which may have been made in respect of the taxpayer and as such, are unable to assist taxpayers to monitor their contribution levels.
2.36 Submissions from superannuation funds to the current review have indicated some difficulties and tensions which have arisen between the fund and their members where taxpayers who are levied ECT believe that it was incumbent on the superannuation fund to warn them of potential excess contributions. In this regard, some superannuation funds have sought to assist their members through specific mail out campaigns and active monitoring on behalf of their members. However, it was noted that such efforts can only go so far, as mail outs are costly and may take many months. Furthermore, where taxpayers have multiple funds, unilateral monitoring does not assist to inform taxpayers of their total contribution levels.
Delays in identifying potential excess contributions
2.37 Stakeholders have raised concerns that the ATO's pre-assessment letter is often the first indication to taxpayers that they have exceeded their contributions caps. However, given the inherent delays in superannuation funds and taxpayers providing information to the ATO, as well as the ATO's own internal processes for detecting instances of excess contributions, this notification is not timely. Stakeholders point to a number of examples in which much of the delay seemed to have been in relation to excess contributions made in the 2008-09 financial year, the year following the implementation of ECT. In some of these cases, it was alleged that delays of up to two years were reported between the taxpayer exceeding a relevant contributions cap and the ECT assessment issuing.
2.38 Stakeholders are concerned that these delays compound taxpayers' exposure to the ECT through ongoing contributions resulting in the amount of the excess increasing.
2.39 As the ATO must wait for all superannuation fund information to be received before accurate data matching can occur, some time delay is unavoidable, especially where taxpayers have multiple superannuation funds. As noted in Chapter 1, there are delays between a superannuation fund receiving a contribution and the ATO being advised of that contribution. For APRA-funds, these delays range from 4 to 16 months and for SMSFs, they range from 4 to 23 months.
2.40 Moreover, as superannuation fund information is matched against individual income tax lodgements, the ATO cannot identify excess contributions until taxpayers have lodged relevant returns.
2.41 Some taxpayers may also have access to extended lodgement timeframes up to June following the end of the financial year.119 However, the ATO has advised that where 365 days have passed since the due date for lodgement of the income tax return, the ATO's system will automatically issue a pre-assessment letter based on information provided by the superannuation funds.120
Timeframes between the ATO receiving information and notifying taxpayers
2.42 Once the ATO has in its possession all the relevant information, further delays may also be experienced.
2.43 Table 11 below outlines statistics on the amount of time elapsed between the end of the financial year and when taxpayers are informed of potential excess contributions.
|Number of Cases||Financial Year: Based on Case Period End||Total|
|How many Months between Case Period End and Letter Sent?||2009-10||%||2010-11||%||2011-12||%|
|5 < 6 months||2,738||100%||2,738|
|6 < 7 months||6,581||15.2%||6,581|
|7 < 8 months||6,762||15.6%||6,762|
|8 < 9 months||14,808||27.9%||13,460||31%||28,268|
|9 < 10 months||3,150||5.9%||34||0.1%||3,184|
|10 < 11 months||5,777||10.9%||7,184||16.6%||12,961|
|11 < 12 months||12,097||22.8%||6,036||13.9%||18,133|
|1 year < 18 months||16,127||30.4%||3,248||7.5%||19,375|
|18 months < 2 years||885||1.7%||50||0.1%||935|
|>= 2 years||210||0.4%||210|
2.44 Table 11 shows that over time, improvements in the ATO's processes have resulted in letters issuing to taxpayers sooner following the end of the financial year. In 2009-10, these letters did not commence issuing until 8 to 9 months following the financial year end. This was reduced to 6 to 7 months in 2010-11 and to less than six months in 2011-12.
2.45 While the end of the financial year may be used to calculate elapsed time, it does not take into account the time necessary for third party information to be provided before the ATO can commence its data matching. As such, it does not identify when the ATO actually became aware of the potential excess contributions.
2.46 The ATO has advised that on the Saturday immediately following receipt of such information, the ATO system compares information provided by taxpayers in their tax returns and data provided by superannuation funds. From this comparison, a 'cap exceeded form' (CEF) is generated which identifies all taxpayers who have exceeded one or both caps. On the following Wednesday, the ATO system assigns an appropriate treatment for these identified taxpayers.122
2.47 The generation of the CEF is the earliest point at which the ATO may be taken to be aware that taxpayers have exceeded their contributions caps. However, the ATO does not maintain specific statistics regarding the time elapsed between the generation of the CEF and the issue of the pre-assessment letter.
2.48 At the IGT's request, the ATO provided a statistical sample of 1000 cases from its internal case management system. Of these 1000 cases, the IGT could only identify a sub-sample of 448 cases in which dates were provided for the CEF generation, the pre-assessment letter issuing and whether the ATO noted the taxpayer exceeded their cap again. This sub-sample of 448 cases illustrates that a significant period of time may elapse between the ATO becoming aware of the excess contribution and the taxpayer being notified. These statistics are outlined in Table 12, together with the number and proportion of cases where the taxpayer had repeated excess contributions.
|Number of days elapsed||Number of cases||# of cases with repeat excess contributions||% of repeat|
|0 - 30||33||4||12.12|
|31 - 60||49||4||8.16|
|61 - 90||57||11||19.30|
|91 - 120||28||6||21.43|
|121 - 150||79||15||18.99|
|151 - 180||51||14||27.45|
|181 - 210||25||6||24.00|
|211 - 240||30||13||43.33|
|241 - 270||15||2||13.33|
|271 - 300||13||5||38.46|
|301 - 330||2||0||0.00|
|331 - 360||2||0||0.00|
|361 - 390||14||1||7.14|
|391 - 420||7||2||28.57|
|421 - 450||2||2||100.00|
|451 - 480||7||4||57.14|
|481 - 510||12||7||58.33|
|511 - 540||2||1||50.00|
|541 - 570||9||5||55.56|
|571 - 600||4||2||50.00|
|601 - 630||7||4||57.14|
2.49 Table 12 shows that in 66.29 per cent of cases (297 out of 448), the ATO issued the taxpayer with a pre-assessment letter within six months of generating the CEF. Within a year following the generation of the CEF, the ATO had issued pre-assessment letters in 85.71 per cent of cases (384 out of 448). Only a relatively small fraction of cases resulted in pre-assessment letters that were issued more than a year after the CEF had been generated (14.29 per cent).
2.50 The data in Table 12 also shows the proportion of those cases within each elapsed time period where the taxpayer had repeated excess contributions. Those cases in which the taxpayer was notified of the original excess contribution within a year experienced generally lower rates of repeat excess contributions, less than 50 per cent. However, as the elapsed period increases, the proportion of repeat excess contribution cases also increases, being 50 per cent or more in all but two periods (cases taking 361 to 390 and 391 to 420 days).
2.51 The ATO recognises the importance of more efficient and timely data matching to identify excess contributions cases. As part of its Annual Work Plan for 2012-13, an internal management report, which outlines staffing, systems and other processes to administer the ECT for the coming year, the ATO notes amongst other things that:124
There are a number of principles behind the workplan including;
- …Commencing cases as soon [as] possible so we influence the taxpayer's current year contributions and reduce unintended later year excess cases;...
2.52 The ATO recognises that extended time delays have occurred in issuing pre-assessment letters, particularly in the early years of the ECT regime when it was working to establish systems and processes. In discussions with the IGT, the ATO has advised that, in March 2013, it began implementing initiatives from its ECT Redesign Project. This project aimed to increase the level of automation within the ATO's ECT processes to provide a more timely and efficient means of identifying, and informing taxpayers of, excess contributions.
2.53 As the ECT Redesign Project has only recently been finalised and implemented, the new processes have not yet been active for a full financial year and the ATO has not yet undertaken an analysis of the improvements yielded.
2.54 Stakeholders have expressed concern that the ECT provides insufficient taxpayer protection for:
- genuine taxpayer mistakes;
- matters beyond their control such as delayed receipt or allocation of contributions125 or employers making SG payments which lead to the taxpayer exceeding their contributions caps126 or other third party errors; and
- relying on incorrect or incomplete professional advice.
Genuine taxpayer mistakes
In some circumstances, you can claim restitution (repayment) of an amount you paid to another person, if you paid it in circumstances that the law recognises as a relevant mistake. Even if you do have a right to be repaid, you may still have made a contribution that will count towards your concessional or non-concessional contributions cap.
Where we are satisfied a contribution was made, we will consider if it was reasonably foreseeable to you when that contribution was made that you'd have excess contributions. If there are no special circumstances, we won't disregard or reallocate the amount of the contribution. This will be so even if the amount has been returned.
2.56 Under the ATO's guidelines, absent any other factors, it is likely that the contribution would be counted for ECT purposes, and if the taxpayer exceeded a relevant cap, the taxpayer will be levied with the ECT.
2.57 In other forums, such as the Superannuation Complaints Tribunal (SCT), cases have successfully been brought for the return of contributions made in error. In one case, the taxpayer intended to make a payment for rent but inadvertently made an electronic payment to the superannuation fund. The SCT determined that in these circumstances, the fund must refund the contribution which was inadvertently made to it.129
2.58 As a result of the strictness with which the ATO treats mistaken contributions, some superannuation funds have made payments to their members in purported restitution of mistaken contributions. On this issue, the ATO has outlined its approach in ATO Interpretative Decision (ATO ID) 2010/104.130 In that case, the Commissioner was asked to consider whether the full sum of a contribution ($500,000) would be included for the purposes of determining ECT liability in circumstances where $200,000 had been repaid to the taxpayer.
2.59 The Commissioner expressed the view that notwithstanding the return of a portion of the contribution, the entire sum would be included for the purposes of assessing the ECT. In support of this conclusion, the Commissioner had regard to a number of judicial decisions including the decision of the High Court in David Securities Pty Ltd v Commonwealth Bank of Australia131 and the New South Wales Supreme Court decision in Personalised Transport Services Pty Ltd v AMP Superannuation Ltd and Anor.132 The ATO also considered the aforementioned SCT case concerning a rent payment that was mistakenly paid to the superannuation fund.133
2.60 In arriving at its view on the matter that was subject of the ATO ID, the ATO acknowledged that the laws of restitution and unjust enrichment applied to superannuation funds, but differentiated the case at hand in that the taxpayer was not under any mistaken belief regarding the contribution itself. Rather, the mistake in this instance related to the consequences of the contribution. In that case, the ATO did not consider that it was unjust for the superannuation fund to retain the whole of the contribution and, accordingly, its entire sum would be included for ECT purposes. The ATO view is consistent with observations that it made in 2008 to external stakeholders as part of its National Tax Liaison Group Super Technical Sub-group. At that forum, the ATO noted:134
A trustee may refund a contribution made to the fund in respect of a member, only in the circumstances set out in regulation 7.04 [of the Superannuation Industry (Supervision) Regulations 1994]. A payment in the nature of a genuine mistake which, at the time of making the payment was not intended to be a contribution, may be refunded to the payer. However a contribution which is later regretted due to the excess contributions tax or other consequences can not be refunded by the trustee.
2.61 The IGT is not aware of any other ATO material or any judicial determinations which considered the effect of restitutionary payments on taxpayers' liability to the ECT.
Matters beyond the taxpayer's control
2.62 Taxpayers may also exceed their contributions caps as a result of matters beyond their control. These may include, for example, delayed receipt or allocation of contributions by superannuation funds,135 payment of SG at a higher rate or employer or other third party errors.
Delayed receipt or allocation of contributions
2.63 Generally, a contribution will be made when the amount is received by the superannuation fund or credited to augment the relevant account.136 Delayed receipt or allocation of contributions arise where a taxpayer contributes to their fund near the end of the financial year but for a number of reasons, such as the time taken for electronic processing, the superannuation fund does not receive or allocate the contribution until the following financial year.
2.64 An examination of the cases which have come before the AAT and the Federal Court indicate that 9 cases have involved such delays, which vary from as little as one business day to 19 business days. These cases are outlined briefly in Table 13.
|Decision date||Case name||Case citation||Employer or personal contribution||Business Days late|
|6/03/2012||Peaker|| AATA 140||Employer||5|
|23/03/2012||Chantrell|| AATA 179||Personal||2|
|04/04/2012||Bernhardi|| AATA 216||Employer||6|
|25/05/2012||Rawson|| AATA 322||Employer||1|
|5/06/2012||Paget|| AATA 334||Employer||1|
|13/07/2012||Colless|| AATA 441||Employer||2|
|01/11/2012||Davenport|| AATA 760||Employer||1|
|15/01/2013||Vershuer|| AATA 12||Employer||19|
|20/02/2014||Liwszyc|| FCA 112||Employer||1|
2.65 As outlined in Table 13, in all but one case the contributions involved were made by employers on behalf of their employees either in accordance with salary sacrifice arrangements or to pay the SG.
2.66 To an extent, the existing legislation recognises that in some instances, taxpayers may not have control over the actions leading to excess contributions being made. The legislation provides that, in the exercise of his discretion (which is discussed in more detail further below), the Commissioner may have regard to:137
- whether it was reasonably foreseeable, when a relevant contribution was made, that you would have excess concessional contributions or excess non-concessional contributions for the relevant financial year, and in particular:
- if the relevant contribution is made in respect of you by another individual--the terms of any agreement or arrangement between you and that individual as to the amount and timing of the contribution; and
- the extent to which you had control over the making of the contribution...
2.67 The application of a 'reasonably foreseeable' test to these instances has resulted in a number of cases in which taxpayers were unsuccessful in compelling the exercise of discretion. No case in Table 13 resulted in a finding that discretion should be exercised in favour of the taxpayer.
2.68 Another situation in which taxpayers may attract the ECT for matters beyond their control relates to the interaction between the SG and the ECT regimes. The SG regime imposes an obligation on employers to make compulsory contributions of superannuation for eligible employees at a minimum rate of 9.25 per cent. In many cases, the rate of contributions to be made may be higher, such as in the case of some Australian Public Service enterprise agreements and certain awards in other industries.138
2.69 SG payments count towards a taxpayer's concessional contribution cap, though this is sometimes not understood by taxpayers. Moreover, many taxpayers may be unaware that SG payments may be based on additional income such as bonuses and overtime, which could result in higher levels of SG payments being made in certain periods.
2.70 By reason of the SG and the ECT regimes operating together, and SG payments forming a large component of concessional contributions, taxpayers may find themselves exceeding the concessional cap by reason of their employers complying with obligations imposed by the SG regime. For example, a taxpayer may be a non-executive director on a number of boards and receive a salary as well as SG payments in respect of each of those roles. The total contributions for each of these roles may result in the taxpayer exceeding their concessional contributions cap.
2.71 Another situation which may arise is where the ATO undertakes compliance activities in relation to employers' SG compliance. As part of these activities, the ATO may determine that a taxpayer previously classified by their employer as a contractor (and therefore, no SG was paid and the contractor made their own personal superannuation contributions) should correctly be treated as an employee and assess the employer for unpaid SG which is passed on to the relevant funds. As a consequence, the combined effect of personal contributions already made and the SG payments may lead to excess contributions. The ATO is aware of one case in which this has occurred and the discretion was exercised to reallocate payments to avoid contributions caps being exceeded.
2.72 Finally, the timing of SG payments may also result in taxpayers exceeding their concessional contributions cap. One reason for this is that the current legislation allows employers up to 28 days following the end of a financial year to make the relevant SG payments relating to work undertaken in the final quarter of that year.139 Where taxpayers are unaware of this fact or do not appreciate that the contribution, for ECT purposes, is taken to have been made in the financial year that it is received, they may exceed their contributions caps through subsequent contributions. Eight matters have come before the AAT on this issue. These cases are set out in Table 14 below.
|Decision date||Case name||Case citation||SG payment made||Year in which work undertaken|
|13/01/2012||Schuurmans-Stekhoven|| AATA 62||10 July 2007||2006-07|
|28/02/2012||Naude|| AATA 130||02 July 2007
16 July 2008
|28/02/2012||Leckie|| AATA 129||16 July 2008
8 July 2009
|11/05/2012||Kuyper|| AATA 282||8 July 2009||2008-09|
|06/07/2012||Bornstein|| AATA 441||10 July 2007||2006-07|
|26/07/2012||Hamad|| AATA 530||July 2009||2008-09|
|30/08/2012||Longcake|| AATA 576||July 2009||2008-09|
|01/11/2012||Applicant 1659|| AATA 754||1 July 2009||2008-09|
2.73 Of the eight cases in Table 14, three cases succeeded in the AAT to have their excess contributions either disregarded or reallocated to another financial year.140 However, it is worth noting that in all three cases, the reasons for decision do not turn on the timing of the SG payments alone.
Employer or other third party errors
2.74 Submissions to the IGT have indicated that in some cases, taxpayers have also exceeded their contributions caps by reason of employer errors. Typically, such errors occur where taxpayers have entered into salary sacrifice arrangements for contributions into superannuation funds and instructions on timing and quantum of the contributions have not been properly carried out.141
2.75 Other errors along similar lines include instances where employers or financial advisers, through simple transpositional errors, have inadvertently contributed more to superannuation funds than was intended.
Taxpayer reliance on professional advice
2.76 It is generally accepted that taxpayers should seek independent tax or financial advice before entering into any transactions which may have taxation consequences. However, in practice, this may not always occur. Moreover, as a number of cases have demonstrated, reliance on financial advisers does not always result in correct decisions being made, nor does it afford any level of protection for taxpayers against the imposition of the ECT where such advice is later shown to be incomplete or inaccurate.142
2.77 The ATO has repeatedly reiterated its view that adviser error or 'inadvertent poor advice',143 in itself, is not sufficient to warrant the exercise of the Commissioner's discretion. PSLA 2008/1 states:144
Incorrect professional advice — as with ignorance of the law, this would not generally amount to special circumstances, unless there were other special factors leading to the mistake. For example, if the incorrect professional advice was based on a widely understood view of the law that was ultimately found by a court to be incorrect, the incorrect advice may constitute special circumstances. However, the mere fact that a particular mistake is of a type that is 'not uncommon' or results from an incorrect interpretation of a provision which some may find hard to apply, would not generally make the circumstances sufficiently special to warrant exercise of the Commissioner's discretion.
Insufficient scope of the Commissioner's discretion
2.78 Taxpayers' grievance at being levied the ECT for genuine mistakes, matters beyond their control and incorrect advice are exacerbated when they are unsuccessful in seeking the Commissioner's discretion to disregard or reallocate the excess contributions. Such a situation arises owing to the strict tests which must be met before the discretion may be exercised. In addition, stakeholders also expressed concern regarding the consistency of the ATO's exercise of the Commissioner's discretion. The latter issue is discussed in detail in Chapter 3.
2.79 A critical condition for the exercise of the Commissioner's discretion is the requirement that there be 'special circumstances'.
2.80 The legislation does not provide a definition of 'special circumstances'. On this issue, the explanatory memorandum notes:145
The courts have considered what 'special circumstances' means in many different contexts. It is clear from the case law that special circumstances are unusual circumstances, or circumstances out of the ordinary. Whether circumstances are special will vary from case-to-case as the context requires, but in this context they must make it unjust, unreasonable or inappropriate to impose the liability for excess contributions tax.
2.81 The explanatory memorandum further notes:146
1.118 However, in making the determination [on the discretion], the Commissioner may have regard to certain matters specified in the law. These are whether:
- the contributions made in a particular financial year would be allocated more appropriately to another year; and
- it was reasonably foreseeable a particular contribution would result in a person having an excess contribution when the contribution was made.
1.119 When considering whether an excess is reasonably foreseeable, the Commissioner may consider the terms of any agreement or arrangement between the individual and another person where those terms affect the amount or timing of the contribution. For example, where contributions are made by an employer under a workplace agreement, industrial award or an effective salary sacrifice agreement the Commissioner will need to consider the terms of those agreements. The Commissioner may also consider the extent to which the individual has control over the making of the contribution. For example, a person who is making a contribution towards the end of a financial year should ensure that the fund receives the contribution before the end of the financial year to ensure it is taken into account in that year and not the subsequent one.
2.82 The ATO has not outlined any specific interpretation of 'special circumstances' beyond adopting the text of the explanatory memorandum outlined above.147 The ATO further notes that it is not possible to lay down precise rules in respect of 'special circumstances' but that the circumstances of the case must be 'unusual to take the case outside the ordinary course.'148
2.83 Only a relatively small proportion of applications for exercise of the discretion have succeeded, though this has steadily increased over time. The ATO's publicly issued statistics in relation to the numbers and outcomes of these applications are set out in Table 15.149
|No discretion exercised||561||829||875||1,879||901||73||5,118|
|Percentage of discretion not exercised||87%||62.5%||77.5%||72.8%||64.5%||39%||70.45%|
|Percentage of discretion exercised||13%||37.5%||22%||26.7%||34%||48.1%||28.66%|
2.84 Table 15 shows that in 2007-08, the ATO received 1,327 applications for the exercise of the discretion which decreased to 1,129 in 2008-09. In 2009-10, following a reduction in the concessional contributions thresholds, the ATO reported a significant increase in these applications with 2,580 having been received. In 2010-11, 1,396 applications were received. In 2011-12, the ATO reported significantly reduced numbers of discretion applications with only 187 having been received.150
2.85 While the level of discretion applications have largely remained consistent, with the exception of the 2009-10 and 2011-12 financial years, the proportion of such applications which resulted in the discretion being exercised have steadily increased since 2008-09. In 2007-08, 37.5 per cent of applications resulted in the discretion being exercised. This decreased to 22 per cent in 2008-09 but progressively increased to 26.7, 34 and 48.1 per cent in 2009-10, 2010-11 and 2011-12, respectively.151
2.86 These publicly issued statistics differ slightly from data provided by the ATO from its enterprise case management system, Siebel, which show that between the 2008-09 to 2012-13 financial years to date, the ATO received and actioned 7,734 applications for the exercise of the Commissioner's discretion. This represents a difference of 470 cases from the published statistics and may be attributable to record-keeping and reporting errors, duplicates in records and other data entry anomalies. The difference is negligible, representing only 6 per cent of the total discretion cases reported.152
2.87 Of the 7,264 cases reported by the ATO, the Commissioner exercised his discretion in 2,082 cases (28.66 per cent) and refused to do so in 5,118 case (70.45 per cent), with the remainder still being considered. In relation to taxpayer challenges of decisions not to exercise the Commissioner's discretion, the ATO's data shows that, to date, it has received and actioned 2,918 objection applications. This represents a 40 per cent objection rate against total discretion applications and a 57 per cent objection rate against total instances in which no discretion was exercised.
2.88 The outcomes of objections against discretion decisions are outlined in Table 16 below.
|Allowed in Full||273|
|Allowed in Part||56|
|Other/No Outcome Recorded||316|
2.89 Table 16 shows that 11.3 per cent of cases resulted in the objection being allowed in full or in part, while 25 per cent were disallowed. The majority of cases, representing more than half of all applications (51.6 per cent), were reported to be invalid, withdrawn by the taxpayer or otherwise resulted in no further action being undertaken.
Challenging the discretion decision in the AAT and the Federal Court
2.90 Though originally not a reviewable decision,154 since 2010 taxpayers have been able to seek review of the exercise of the Commissioner's discretion through either the AAT or the Federal Court.155
2.91 Statistics provided by the ATO indicate that to date, 121 applications have been lodged to seek review of or appeal the ATO's discretion decision. Of these, 115 applications were lodged in the AAT and the remaining 6 were lodged in the Federal Court.
2.92 Despite the high number of applications lodged in the AAT and the Federal Court, only 25 were heard and determined by the AAT. The remaining matters were withdrawn, disposed of by consent or otherwise dismissed by the AAT. Two matters have been heard and determined by the Federal Court. In one case, judgment has been handed down in favour of the Commissioner156 while in the other, the Commissioner's appeal from a decision of the AAT has been allowed and the matter remitted to the Tribunal to be heard and determined according to law.157
2.93 In the Federal Court case in which ATO recently succeeded, two payments of superannuation contributions made on behalf of the taxpayer were mistimed. In particular, the company bookkeeper initiated these payments on 30 June 2009 and the superannuation fund applied them to the taxpayer's account on 1 July 2009. As a result, these payments were treated as superannuation contributions for the 2009-10 financial year and together with other payments gave rise to an ECT liability. The Commissioner refused to exercise his discretion to reallocate these contributions to another year and the taxpayer appealed to the Federal Court. In his reasons for dismissing the taxpayer's appeal, Justice McKerracher concluded that 'while it may be accepted that it is entirely commonplace to delegate tasks of this nature and that entirely innocent errors were made, the legislation does not enable the errors to be corrected.'158
2.94 Of the 25 matters heard and determined by the AAT, all but four (84 per cent) were decided in favour of the Commissioner. The ATO considers that this high proportion of ATO success demonstrates that its exercise of the discretion is consistent with the legislation.
2.95 Stakeholders have acknowledged that the ATO has enjoyed high levels of favourable decisions in the AAT. However, they have also asserted that the ATO is often well-represented by litigation officers or counsel while taxpayers in these matters are often self-represented particularly in the AAT. As a result, these stakeholders consider that taxpayers are at an immediate disadvantage when seeking to argue legal merits of why 'special circumstances' applied to their case.
Monitoring burden imposed on taxpayers
2.96 The information burden imposed on taxpayers is onerous and, in some cases, difficult to discharge as it requires time and effort to collect and collate all relevant information.
2.97 While it is possible for taxpayers to determine aggregate levels of superannuation contributions, such a task requires the taxpayer or their adviser to be aware of a number of matters including:
- all superannuation funds of which the taxpayer is a member;
- all sources of contributions to each of those superannuation funds;
- the timing and processes that each of the contributors adopts when remitting superannuation contributions to the funds;
- whether any special provisions apply to contributions made to defined benefit plans;
- the levels of contributions for prior years to assess whether the 'bring forward' provision has been previously triggered;
- whether any exemptions or deductions were claimable by the taxpayer which may alter the character of the contribution and, if so, whether these have been correctly claimed; and
- the timing and processes of each of the superannuation funds to receive and allocate contributions.
2.98 Where taxpayers and their advisers are not aware of, or do not consider these issues, there is the potential for the information obtained to be incomplete or inaccurate. Even where taxpayers and their advisers request details of the above, it is possible that record-keeping or other errors caused by contributors or the superannuation funds may hinder the taxpayer's access to complete, accurate and timely information regarding contribution levels. The result may be that taxpayers exceed their contributions cap despite reasonable attempts to identify the amount of relevant contributions.
2.99 The monitoring burden on taxpayers could be relieved through a centralised repository of all contributions information on which the taxpayer may rely in determining whether they have exceeded, or are close to exceeding, a contributions cap for a particular year. However, providing such a repository would require substantial action and investment, including:
- appropriate information technology platforms to host the relevant data;
- legislative amendments to alter the timing and frequency of contributions data reporting;
- appropriate monitoring by the administrator to ensure the data integrity and accuracy; and
- sufficient legislative provisions to protect taxpayers who reasonably rely on such data where it proves to be incomplete or inaccurate.
2.100 Accordingly, any central repository would need to be considered in the longer term as information technology systems and administrative arrangements evolve. Notwithstanding these challenges, the IGT considers that, in the short term, taxpayer difficulties in monitoring contributions may be ameliorated by reducing the impact of the ECT through improved ATO identification and notification of excess contributions and taxpayer protections, which are discussed below.
Delays in identifying potential excess contributions
2.101 The timely and efficient identification of ECT cases serves a number of different purposes. First, it ensures that taxpayers are notified at the earliest point of the excess contributions to assist them to better manage future period contributions. Secondly, where the ATO requires additional information from these taxpayers or their superannuation funds, timely contact makes it easier for the information to be obtained and provided. Thirdly, early identification ensures that the ATO's compliance action is timely and the risks of not being able to recover unpaid tax are reduced.
2.102 As discussed earlier, due to superannuation fund reporting and income tax return lodgement dates, there may be a delay of between 4 to 23 months while the ATO waits for third party data to identify excess contributions. When combined with the time taken for the ATO to effect its internal work processes (as illustrated in Table 11 and Table 12), 4 to 45 months may elapse between relevant contributions being made and the ATO alerting taxpayers of the excess contribution.
2.103 The ATO may receive all relevant information concerning taxpayers with simple tax affairs and their APRA-regulated superannuation funds within four months of the end of the financial year. Long periods are experienced where taxpayers may delay their income tax lodgements (often, legitimately through tax agent lodgement concessions) and have SMSF funds to which contributions are made. Such delays may be mitigated by the ATO encouraging taxpayers, tax agents and superannuation funds to lodge sooner. However, the ATO cannot unilaterally require earlier lodgement dates. These dates are prescribed by statute and any proposal to reduce lodgement timeframes would need to consider the additional compliance costs that may be imposed on superannuation funds.
2.104 Notwithstanding the lodgement timeframes, the IGT considers that there is benefit in the ATO reducing the time it takes to notify taxpayers of excess contributions. In this respect, the IGT notes that where the ATO had received all relevant information but had taken longer than twelve months to issue the pre-assessment letter, there appeared to be a higher incidence of taxpayers repeatedly exceeding contribution caps. Accordingly, as part of its ECT Redesign Project discussed earlier, the IGT is of the view that the ATO should ensure that it notifies taxpayers of any excess contributions within six months of receiving all relevant information to minimise the risk of taxpayers further exceeding their contributions caps.
2.105 In addition to reducing the time the ATO takes to notify taxpayers of an ECT liability, the IGT also considers that there is opportunity to alert taxpayers to potential excess non-concessional contributions. Such early notification is particularly important due to the large ECT liabilities that may arise from these contributions which have already been subject to income tax. Moreover, as the 'bring forward' provision is triggered in the first year in which taxpayers make more than $150,000 in non-concessional contributions, taxpayers may have an additional two years to regulate their contributions so as to avoid contributing more than $450,000 over the relevant three year period. However, the ATO does not notify taxpayers where they have triggered the 'bring forward' provision. The ATO only notifies taxpayers after taxpayers have contributed more than $450,000 over the relevant three year period as the ATO considers that there is limited utility in any earlier notification due to:
- the time delays (discussed earlier) which may hamper the ATO's ability to identify and issue notifications on excess contributions for up to two years after the first contribution is made;
- the 'bring forward' provision not applying to approximately half of the taxpayers who exceed the non-concessional contributions cap as they are aged 65 or older;159 and
- the cap being exceeded due to large lump sum contributions, such as those a result of windfall gains, sales of property or inheritances.
2.106 Notwithstanding these potential limitations, the IGT considers that promptly advising taxpayers that they have exceeded the $150,000 annual non-concessional cap would provide at least some taxpayers with an opportunity to mitigate the risk of becoming liable to the ECT. This would also encourage appropriate taxpayer behaviour in the future.
The IGT recommends that the ATO:
- ensure that pre-assessment letters are issued to taxpayers within six months of the ATO receiving all relevant information;
- periodically assess the efficiency and effectiveness of the systems and processes in identifying and communicating instances of excess contributions to improve their timeliness and efficiency; and
- promptly notify taxpayers when they have triggered the 'bring forward' provision.
Agree with recommendation 2.2 (a).
Agree with recommendation 2.2 (b).
Agree in principle with recommendation 2.2 (c).
The ATO agrees to explore options for promptly notifying taxpayers when they have triggered the 'bring forward'. This will include an assessment of whether any such options would allow us to inform taxpayers in a timely and cost effective manner (i.e. before a liability is triggered).
2.107 The notifications discussed above may not benefit all taxpayers who exceed the non-concessional contributions cap. Accordingly, the IGT is of the view that appropriate taxpayer protections should operate to mitigate any disproportionate effect that the ECT may have in cases where taxpayers, or their advisers, have made genuine mistakes.
2.108 Stakeholders have argued that the current level of protection is insufficient as taxpayers may be levied with the ECT in circumstances where they have taken reasonable steps to comply with their obligations but have nonetheless exceeded their contributions caps by reason of genuine mistakes they, or their advisers, have made. These concerns are well known to the ATO, with a number of questions being put to it on this point by Parliamentary committees.160 In particular, stakeholders have noted that unlike other areas of tax law, taxpayers are unable to effectively take action to correct or amend mistakes in the ECT regime.
2.109 The ATO's view is that a mistake of fact leading to the contribution being made, for example the taxpayer intended to pay rent but inadvertently transferred the payment to the superannuation fund, may be refunded. However, the ATO considers that superannuation funds cannot refund contributions which the taxpayer has intentionally made but later regrets once they appreciate that ECT would become payable.161 At its ATO Tax Practitioner Forum meeting in August 2009, the ATO indicated that it would issue additional guidance on the issue of mistake to reflect its view that mistakes causing the contribution may be rectified but mistakes as to consequence may not.162
2.110 In the IGT's view, the ATO's guidance on issues of genuine mistake is ambiguous. On the one hand it notes that restitution may be possible but on the other states that the contribution may nonetheless be counted for the purposes of the ECT.163 In addition, examples on the ATO's website concerning whether the Commissioner may exercise his discretion in circumstances of mistakes only provide examples where no discretion is exercised. This may give the impression to taxpayers and tax advisers that the ATO is reluctant to entertain the idea of exercising the discretion for any mistake.
2.111 The issues affecting the doctrine of mistake and the laws of restitution are complex. At present, the ATO's public guidance material does not appear to address the different issues in this area and, as such, may lead to uncertainty and confusion for those seeking to better understand the ATO's approach. Accordingly, the IGT considers that the ATO should update its public guidance materials, such as its website and issue additional guidance, to reflect both situations where rectification of mistakes may be effective in excluding contributions for the purposes of the ECT and those in which it may not.
2.112 In respect of matters which are outside of the taxpayer's control, there may be some additional remedies available to the taxpayer. For example, in relation to delayed receipt or allocation of contributions, the IGT notes that the introduction of the SuperStream reforms which require APRA-regulated superannuation funds, from 1 July 2014, to allocate contributions within three business days should assist to alleviate time delays in superannuation funds allocating contributions.164 The IGT notes, however, that this requirement is only applicable to APRA funds and not SMSFs.
2.113 Where third parties such as employers or financial advisers have made errors, some suggested avenues of recourse for taxpayers include litigation for breach of contract or professional negligence. However, these avenues are undesirable as they are time consuming and costly. They may also lead to damaged professional or employer/employee relationships and increased indemnity insurance premiums for advisers which are likely to be passed on to taxpayers through professional fees.
Scope of Commissioner's discretion
2.114 Given the limitations and consequences of the above remedies, effectively, the only alternative in the majority of cases is for taxpayers to seek an exercise of the Commissioner's discretion to disregard or reallocate the relevant excess contribution.
2.115 However, the ATO has indicated that incorrect professional advice will not necessarily result in a finding of special circumstances warranting exercise of the discretion.165 Therefore, taxpayers may feel they have been unduly penalised despite seeking to obtain assistance in complying with the law. In the AAT, the case of Dowling v Commissioner of Taxation (the Dowling case)166 has shown that in some circumstances, reliance on professional advice may be sufficient for the exercise of the discretion. However, as that decision was recently set aside by the Federal Court and the matter remitted to the AAT for rehearing,167 the final position on this point is unclear.
2.116 Similarly, mistakes, whether occasioned by the taxpayer or some other third party will not necessarily, in the ATO's view, meet the criteria to warrant an exercise of the Commissioner's discretion. The limited application of the Commissioner's discretion is highlighted in the statistics presented earlier on the proportions of successful applications.
2.117 As detailed earlier, while the proportion of successful applications for the exercise of the Commissioner's discretion has steadily increased over the years following 2008-09, it has also generated high levels of disputes through the objections process. The IGT notes that the rates of objection against decisions not to exercise the discretion are very high when compared with the enterprise objections rates across all compliance activities which was reported to be 4.7 per cent in 2011-12.168
2.118 The high objection rates may be as a result of a number of driving factors including the risk of losing significant portions of retirement income and feelings that taxpayers have been unfairly penalised for genuine mistakes or for matters beyond their control.
2.119 In contrast, however, the IGT notes that notwithstanding the high number of ECT objections, only a small fraction of objection applications (11.3 per cent) were allowed in full or in part which is well short of the allowance rates for objections generally.169 Furthermore, only 8.1 per cent of cases in which the objection was not allowed in full or in part proceeded further through applications for review or appeal in the AAT or the Federal Court.170 This is not surprising as one of the reasons for this decline may be the costs, time and added formality of external reviews and appeals which may serve to deter taxpayers from proceeding further to dispute the ATO's decision.171 In the ECT context, this is especially true as some of the taxpayers affected are individuals who may be ill-equipped to effectively challenge ATO decisions.
2.120 The IGT notes the intent of the Commissioner's discretion to prevent instances where the ECT may be imposed which would be unjust, unreasonable or inappropriate. Having regard to this policy intent, the heavy monitoring burden imposed on taxpayers, the likelihood of mistakes being made and the high rates of disputes arising out of discretion decisions, it is arguable that the discretion does not provide adequate protection for taxpayers who are generally seeking to comply with their obligations.
2.121 The issue may be, as some stakeholders have suggested, that the ATO is adopting a narrower interpretation of the 'special circumstances' requirement within the discretion than is warranted by the legislation. However, the high proportion of cases in which the Commissioner's decision has been affirmed suggests that the ATO has correctly applied the discretion, albeit that the interpretation may appear narrow. In this respect, the Federal Court case of Liwszyc v Commissioner of Taxation (the Liwszyc case)172 has provided judicial clarification of the application of the term 'special circumstances' to employee errors and the rehearing of the Dowling case in the AAT may also provide greater clarification in relation to adviser errors. Moreover, the scope of this term may also be further considered in any subsequent appeals to the Full Federal Court.
2.122 Ultimately, the IGT considers that, having regard to the burden imposed on taxpayers and the severe impacts of excess non-concessional contributions, the corresponding protections should be broadened to accommodate a wider range of circumstances to protect those who have acted reasonably and in good faith. This may be achieved in a number of ways.
2.123 First, while the ATO may be constrained in adopting a broader application of the Commissioner's discretion, the rehearing of the Dowling case and any subsequent appeals in that case as well as the Liwszyc case may clarify the limits of the discretion and provide a basis on which the Commissioner may broaden the application of the discretion.
2.124 Secondly, where the decisions of the Court do not provide a basis for the Commissioner to adopt a broader interpretation, the Government may wish to consider whether the current protections for taxpayers sufficiently take into account circumstances of genuine mistake and matters beyond their control. In this respect, the IGT is of the view that there would be significant benefits in the Government considering legislative changes to provide further protections for taxpayers who have acted reasonably and in good faith.
2.125 The IGT recognises that such legislative change may not be effected immediately, and that further consultation may be necessary to ensure that an appropriate balance is struck between achieving the policy intent of the ECT regime while minimising undue impacts on taxpayers. In this regard, the Government should consider recommendation 5.3 in the IGT's Review into improving the self assessment system.173 In that report, the IGT recommended that where unintended, anomalous, inequitable or impractical consequences of the tax laws were identified, the Commissioner be given a power to not take compliance action for a period of three years to enable the Government to take corrective action.174
- The IGT recommends that the ATO update its public guidance on genuine mistakes leading to excess contributions to reflect those circumstances in which mistakes may be effectively corrected and those in which it may not.
- In the event that Court decisions do not provide a basis on which the Commissioner may broaden the scope of his discretion in the ECT context, the IGT recommends that the Government consider whether the current protections afforded to taxpayers sufficiently take into account circumstances of genuine mistake or matters beyond their control and if legislative change is required to provide further taxpayer protection.
Agree with recommendation 2.3 (1). Recommendation 2.3 (2) is a matter for Government.
Contributions limiting clauses
2.126 In an ancillary issue to taxpayer mistakes and matters beyond the taxpayer's control leading to excess contributions, some superannuation funds have sought to minimise the risk of their members being exposed to the ECT by including clauses in their trust deeds purporting to cap the amount of contributions able to be made and to return any excess contributions to the member (contributions limiting clauses).
2.127 The ATO had previously issued Taxpayer Alert TA 2010/2 (TA 2010/2)175 in which it outlined its view that such clauses are ineffective, that their use could have the effect of avoiding the ECT and that those entities involved may be considered promoters of tax exploitation schemes.176
2.128 At the time of its release, a number of external stakeholders expressed concern with TA 2010/2 and the ATO's characterisation of such clauses as tax exploitation schemes.177 On 29 November 2011, the ATO withdrew TA 2010/2 and replaced it with a fact sheet entitled Fund rules intended to prevent excess contributions tax.178
2.129 The fact sheet is not binding and intended only as a guide. It relevantly states:179
A governing rule of the fund may be designed to prevent certain payments from being a contribution to the fund. For example, a rule may provide that a trustee is not to accept a payment as a contribution if doing so would cause a member to exceed the member's contributions cap for the purposes of ECT. Or a rule may provide that such amounts are to be held subject to a separate trust for the payer or returned to the payer.
Whether such a rule actually prevents a payment from being a contribution, and whether it applies to all or only some categories of such payments (for example, whether it applies to payments by a member's employer), depends on its effect as a matter of trust law. In particular, it depends on whether the rule prevents the payment from increasing the capital of the super fund.
The effect of such a rule must be assessed having regard to its particular terms, interpreted in the context of the surrounding provisions and the governing rules of the fund as a whole.
A governing rule will not prevent a payment from being a contribution where, on its proper construction, it merely empowers the trustee to return or otherwise deal with a payment which is already a contribution to the fund — that is, which has become part of the capital of the fund.
2.130 Stakeholders have expressed a view that this fact sheet has the potential to confuse and mislead taxpayers, advisers and superannuation fund trustees. In particular, stakeholders are concerned that the fact sheet still characterises contributions limiting clauses as a means of preventing the imposition of the ECT rather than a mechanism through which superannuation funds and taxpayers are operating within the intended spirit of the law in regards to contributions levels.180
2.131 The issue was also known to the previous Government and as part of its Revenue Measures in the Mid-Year Economic Fiscal Outlook 2011-12 it was announced that:181
The Government will ensure the integrity of the annual superannuation contribution caps by ensuring that certain trust deed clauses cannot be used to avoid what would otherwise be excess contributions from being counted against the caps.
The Government is aware of situations where a fund may include a clause in its trust deed that is designed to treat amounts that would otherwise have been considered contributions to the fund (for example, as they have been accepted by the fund and intermingled with other fund assets and investments) as not having been accepted by the fund if those contributions would lead to a breach of the contributions caps.
Under this measure, the fund will be deemed to have accepted such contributions, notwithstanding the trust deed clause, if the contributions have not been returned promptly and have in effect been intermingled with assets of the fund.
This revenue protection measure will have an unquantifiable but small revenue impact over the forward estimates period.
2.132 On 14 December 2013, the Assistant Treasurer announced that the Government will not proceed with this measure.182
2.133 Contributions limiting clauses present a difficult legal issue for the ATO and for tax advisers as they involve the interaction of superannuation laws, trust law and the ECT. Moreover, the operation of these clauses may have implications for other tax and superannuation laws including that:
- employers may be found to have not complied with their SG obligations where superannuation fund trustees do not accept SG payments; or
- where contributions are later refunded to taxpayers, the ATO may find it difficult to identify such contributions to bring them into account under income tax law and ensure that any deductions previously allowed to the taxpayer are reversed (where they are not outside statutory time limits).
2.134 Stakeholder submissions to the IGT are unequivocal in their view that such clauses are valid, legal and effective in both mitigating the risk for members exceeding their contributions and realising the Government's policy intent.
2.135 For the ATO's part, it considers that the effectiveness of such clauses depends upon the particular text of the trust deed in question and that the issue may warrant judicial consideration.
2.136 As the Government has decided not to proceed with legislative measures to clarify the issue, the IGT considers that there are two options open to the ATO. First, the ATO may continue to assess attempts by superannuation trustees to invoke contributions limiting clauses to return excess contributions to their members. Such a strategy may result in protracted disputes and litigation which would take a number of years before judicial clarification is obtained. This time delay may adversely impact a greater proportion of the industry who have relied on such clauses.
2.137 The better option, in the IGT's view, would be for the ATO to actively identify, through industry consultation, an appropriate test case vehicle through which the issue may be progressed quickly on an agreed set of facts for judicial declaration. In this way, both the ATO and the industry would be able to obtain judicial clarification in a timely manner, while minimising disputes. Moreover, the timely outcome of such test litigation would provide Government with greater insight as to whether any future legislative clarification is necessary to address the issue. Such an approach to obtaining judicial clarification on interpretative issues is in line with recommendations made by the IGT in the Review into the ATO's use of early and alternative dispute resolution.183
2.138 The IGT notes that the ATO had also previously considered that judicial clarification on this issue was important. To facilitate this outcome, the ATO noted at an NTLG meeting that the Test Case Litigation Panel had provided in principle support to fund appropriate cases which may be advanced to the Federal Court.184 While the ATO has advised the IGT that the issue may not be as prevalent as it originally thought, the IGT considers that any ongoing uncertainty in this area is undesirable and that the ATO should again consider identifying an appropriate test case to clarify the law in this regard.
The IGT recommends that the ATO seek an appropriate test case vehicle to obtain a judicial declaration on the effectiveness of contributions limiting clauses to cap the amount of contributions made to superannuation funds.
98 ATO, Excess Contributions Tax Statistical Report (6 April 2013).
99 Senate Standing Committee on Economics, Answers to Questions on Notice, BET 253, 31 May-2 June 2011.
100 Above n 12.
101 Commissioner of Taxation v Administration Appeals Tribunal  FCAFC 37, at .
102 See for example, Michael Bailey, 'Get in early to avoid excess super blooper,' BRW, 23 January 2013; Liz Westover, 'Unfair penalties for excess contributions,' The Australian, April 21 2012; Daryl Dixon, 'Taxation flaws need a remedy,' The Australian, 9 November 2013.
103 Vershuer and the Commissioner of Taxation  AATA 12.
104 Above n 98.
105 ATO, 'ECT demographics data for 2008', internal ATO document, 19 August 2011, p 4; ATO, 'ECT demographics data for 2009', 19 August 2011, internal ATO document, p 4; ATO, 'ECT demographics data for 2008', internal ATO document, 19 August 2011, p 4.
106 ATO communication to the IGT, 27 February 2014; for 2010-11 and 2011-12, these statistics showed that 45.75 and 57.4 per cent of taxpayers exceeding their non-concessional cap had taxable income of less than $37,000.
107 ATO, 'ECT demographic data for 2008, 2009 and 2010', internal ATO document, 19 August 2011, p 8.
108 ibid, p 10.
109 Above n 98.
111 Above n 98.
112 SMSF Professional Association of Australia (SPAA), 'SPAA wants broken excess contributions tax system fixed' (Media release, 13 February 2013).
113 See for example, Michael Bailey, 'Get in early to avoid super blooper,' Australian Financial Review, 23 January 2013; Terry Hayes, 'Super high tax on super contributions — changes needed,' SmartCompany, 24 January 2013.
114 ATO communication to the IGT, 28 August 2013; ATO communication to the IGT, 3 December 2013.
115 ATO communication to the IGT, 3 December 2013.
116 SPAA, 'Super package gives clarity for SMSF industry: SPAA,' Media release, 5 April 2013; Financial Services Council, 'FSC welcomes super announcement before the Budget' (Media release, 5 April 2013).
117 Above n 17.
119 See for example, ATO, Tax agent lodgement program 2013-14 (15 May 2013).
120 ATO communication to the IGT, 25 February 2013.
121 ATO communication to the IGT, 28 March 2013.
122 ATO communication to the IGT, 25 February 2013.
123 IGT, constructed from ATO communication to the IGT, 25 February 2013.
124 ATO communication to the IGT, 13 March 2013.
125 See for example, ATO, Superannuation Excess Contributions Tax: concessional contribution — allocation of contributions, ATO ID 2012/16, 5 March 2012.
126 See for example, University of New South Wales, Superannuation Guarantee (17 May 2013).
127 See also, Liwszyc v Commissioner of Taxation  FCA 112 at .
128 ATO, ECT — applying to have your excess contributions disregarded or reallocated (24 September 2013).
129 Superannuation Complaints Tribunal Determination D06-07\129  SCTA 33 (28 March 2007).
130 ATO, Superannuation excess contributions tax: restitution of a 'mistaken contribution', ATO ID 2010/104, 14 March 2014.
131 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353.
132 Personalised Transport Services Pty Ltd v AMP Superannuation Ltd and Anor  NSWSC 5.
133 Above n 129.
134 ATO, National Tax Liaison Group (NTLG) Superannuation Technical Sub-group, Minutes of the 3 December 2008 meeting, item 6.2.
135 See for example, above n 125.
136 Liwszyc v Commissioner of Taxation  FCA 112 at  and .
137 ITAA 1997, para 291-465(3)(b) and sub-s 292-465(6).
138 See for example, above n 126.
139 Superannuation Guarantee (Administration) Act 1992, sub-s 23(6).
140 Bornstein and Commissioner of Taxation  AATA 441; Hamad and Commissioner of Taxation  AATA 530 and Longcake and Commissioner of Taxation  AATA 576.
141 See for example, Liwszyc v Commissioner of Taxation  FCA 112.
142 See for example, Dowling and the Commissioner of Taxation  AATA 49.
143 ATO, Superannuation Consultative Committee, Minutes of the 7 June 2011 meeting, item 4.
144 Above n 93, para .
145 Explanatory Memorandum, House of Representatives, Tax Law Amendments (Simplified Superannuation) Bill 2006, p 36.
146 ibid, pp 36-37.
147 Above n 93, para .
148 Above n 93, para ; on this point, the ATO drew support from such cases as: Beadle v Director-General of Social Security (1985) 60 ALR 225; Drachnikov and Another v Centrelink and Another (2003) 75 ALD 134 at  and  Minister For Community Services and Health and Another v Chee Keong Thoo (1988) 78 ALR 307; Tefonu Pty Ltd v. Insurance And Superannuation Commissioner (1993) 30 ALD 455.
149 Above n 97.
151 Above n 98.
152 ATO communication to the IGT, 18 October 2013.
153 ATO communication to the IGT, 22 October 2013.
154 Re McMennemin and Federal Commissioner of Taxation  AATA 573; Commissioner of Taxation v Administrative Appeals Tribunal (2011) 91 FCR 400.
155 ITAA 1997, sub-ss 291-465(9) and 292-465(9).
156 Liwszyc v Commissioner of Taxation  FCA 112.
157 Dowling v Commissioner of Taxation  AATA 49; Commissioner of Taxation v Dowling  FCA 252.
158 Liwszyc v Commissioner of Taxation  FCA 112 at .
159 The ATO's statistics indicate that in 2008, 2009 and 2010, 62.88, 42.92 and 40.54 per cent of all taxpayers who exceeded their non-concessional contributions cap were older than 65; above n 107, p 10.
160 Senate Standing Committee on Economics, Question SBT 61; Senate Standing Committee on Economics, Question AET 17.
161 Above n 134, item 6.2.
162 ATO, ATO Tax Practitioner Forum, Minutes of the 7 August 2009 meeting.
163 Above n 128.
164 ATO, Superannuation Data and Payment Standards 2012, Legislative Instrument.
165 Above n 128.
166  AATA 49.
167 Commissioner of Taxation v Dowling  FCA 252.
168 ATO, Your Case Matters (3rd edition, 2013) p 2. The ATO's enterprise objection statistics do not differentiate between those involving discretionary decisions and those that do not.
169 See for example, IGT, Review into the underlying causes and the management of objections to Tax Office decisions, 11 August 2009, p 41.
170 210 review cases out of 2,589 objections which were not allowed in full or in part.
171 Binh Tran-Nam and Michael Walpole, 'Access to tax justice: How costs influence dispute resolution choices,' (2012) 22 JJA 3, p 4.
172  FCA 112.
173 IGT, Review into improving the self assessment system, 13 February 2013, recommendation 5.3(a), p 140.
175 ATO, Circumvention of Excess Contributions Tax, TA 2010/2, 29 November 2011, (Withdrawn).
176 ibid; TAA 1953, sch 1 div 290.
177 ATO, NTLG Superannuation Technical Sub-group, Minutes of the 15 June 2010 meeting, Item 7.
178 ATO, Fund rules intended to prevent excess contributions tax (29 November 2011).
180 Law Council of Australia, Submission to the ATO (16 December 2011).
181 Australian Government, Mid-Year Economic Fiscal Outlook 2011-12, p 174-175.
182 Arthur Sinodinos AO, 'Integrity restored to Australia's taxation system' (Media release, 14 December 2013), item 35.
183 IGT, Review into the ATO's use of early and alternative dispute resolution, 31 July 2012, pp 61-63.
184 ATO, NTLG, Minutes of the 31 March 2010 meeting, item 21.