The Inspector-General of Taxation's (IGT) review into the ATO's administration of the superannuation excess contributions tax (ECT) is one of three concurrent reviews examining aspects of the ATO's compliance approach to individual taxpayers.
The ECT regime commenced operation on 1 July 2007 and was intended to 'improve retirement income' and 'improve incentives to work and save'. The regime did so by 'capping' the amount of contributions which may be made by, or on behalf of, a taxpayer. Where the relevant caps were exceeded, the ECT would be imposed on the taxpayer.
Submissions to the IGT indicated a high degree of dissatisfaction with the regime, contending that it was not operating as intended and imposed a disproportionately adverse impact on taxpayers. Stakeholders noted that although the ECT regime was not originally intended to raise any revenue, ATO statistics show that over 100,000 taxpayers had received ECT assessments, raising more than $550 million in revenue.
During the course of the review, the law was changed to treat excess concessional contributions as assessable income to be taxed at the taxpayer's marginal tax rate. This legislative change addressed certain stakeholder concerns. However, the corresponding law was not changed for excess non-concessional contributions. The IGT observed that while a smaller population of taxpayers exceeded the non-concessional contributions cap, the impact on these taxpayers was more severe. Moreover, the ATO's statistics showed that across all years, approximately half of taxpayers who exceeded their non-concessional contributions cap were within the lowest taxable income range.
Accordingly, the IGT has recommended that the Government consider whether the current treatment of excess non-concessional contributions should be aligned with that of excess concessional contributions to minimise adverse impacts on affected taxpayers.
The IGT has also observed that the ECT regime imposes a significant information monitoring burden on taxpayers and does not sufficiently accommodate particular instances of inadvertent breaches of the caps. Such breaches may be due to genuine mistake, not being able discharge the information monitoring burden despite reasonable efforts or otherwise as a result of third party or adviser error. The scope of the present Commissioner's discretion to disregard or reallocate excess contributions appears very narrow and does not provide relief in these situations. As a result, the IGT has also recommended that the Government consider whether the law accommodates taxpayers appropriately in these circumstances.
Taxpayers also raised concerns regarding the timeliness of the ATO's detection and notification of excess contributions as it affected their ability to take corrective action. Indeed, in certain instances, up to 45 months may elapse between the taxpayer making the contribution and the ATO informing them of an excess contribution. Such delays give rise to a higher risk of repeated excess contributions, compounding the adverse impacts on taxpayers. The IGT has recommended that the ATO improve the timeliness of excess contribution detection, ensure taxpayers are notified of excess contributions within six months of the ATO receiving all relevant information and ensure that taxpayers who trigger the 'bring forward' provision are notified earlier to minimise the risk of ECT liability in later years.
Given the onerous monitoring obligations and the consequences of failing to properly fulfil these obligations, the IGT has identified an opportunity for the ATO to assist taxpayers through its de minimis process whereby ECT assessments are not issued to taxpayers where the excess contribution is below a certain pre-set threshold. While stakeholders were generally supportive of this ATO approach, the lack of public information gave rise to some perceptions of inconsistency.
As a result, the IGT has recommended that the ATO improve the transparency of its de minimis process and to ensure that taxpayer benefiting from this de minimis approach are aware of their contribution levels and the need to take more care in the future to avoid a breach. The ATO has disagreed with this specific recommendation but has indicated more broadly that it is committed to helping taxpayers avoid exceeding the caps inadvertently. Moreover, the ATO is of the view that other IGT recommendations in the report, once implemented, should assist to mitigate the risks of inadvertent excess contributions being made.
The IGT has also identified improvement opportunities in other areas of ECT administration and has made recommendations directed at:
- improving publicly available advice and guidance by reviewing and updating materials on the ATO website;
- promoting the use of administratively binding advice where private rulings are not available;
- assisting taxpayers and superannuation funds to address potential errors in reported superannuation fund data; and
- user-testing the effectiveness of the ATO's standardised correspondence to taxpayers and encouraging direct engagement between ATO staff and taxpayers.
The IGT has made a total of 11 recommendations. Two are directed to the Government and nine are directed to the ATO. The ATO has agreed in full, in part or in principle with eight recommendations and disagreed with one. Whilst there is one point of disagreement, the effective implementation of the agreed recommendations should result in significant and enduring benefits.