Financial Insights - November 2023
A summary of recent superannuation AAT cases
The Administrative Appeals Tribunal (AAT) can review decisions made under more than 400 Commonwealth Acts and legislative instruments. Independent of the person or department that originally made a decision, clients who appeal decisions via the AAT could see the decision affirmed, varied, set aside or remitted back to the department to make a new decision in accordance with instructions or recommendations put forward.
In this month’s article, we explore super related AAT cases covering notice of intent (NOI) forms, reallocation of concessional contributions, excess transfer balance determinations and non-arm’s length income (NALI)
Personal deductible contribution request declined
The Tribunal noted that while the taxpayer had made a personal super contribution and lodged an NOI with the relevant super fund within the required timeframes, the deduction the taxpayer was seeking to claim was appropriately declined by the ATO.
Background
During the 2020-21 financial year, the taxpayer made personal super contributions and lodged a NOI form with the relevant super fund within required timeframes. However, the super fund declared the NOI to be invalid as the form sought to claim a tax deduction for an amount greater than the amount of contributions the taxpayer had made.
Whilst the taxpayer claims to have lodged a subsequent NOI form after being notified by the fund of this oversight, the super fund claims to have never received the subsequent NOI form. Assuming the subsequent NOI form was sufficient, the taxpayer lodged their personal income tax for the 2020-21 financial year without receiving an acknowledgement from the fund.
Decision
The Tribunal agreed with the ATO’s claim not to have any available discretion to overlook the taxpayers’ failings i.e. the onus is on the taxpayer to ensured they have received acknowledgement of the NOI form from the super fund before lodging their tax return
For full text of the case, see Nicholls and Commissioner of Taxation (Taxation) [2023] AATA 2772 (31 August 2023)
Timing and submitting a NOI form
Claiming a deduction for personal super contributions can be a straightforward process however, it’s important that critical administrative requirements are not inadvertently overlooked.
Eligible contributing members must submit the appropriate NOI form to the super fund before the earlier of the following two dates:
Lodgement of the contributing member’s income tax return (for the income year of contribution), and
The end of the income year following the ‘contributing’ income year.
In addition to these deadlines are a set of preconditions that invalidate an NOI if, in broad terms, the fund no longer holds the contribution or if part or all of the capital has been converted into an income stream.
This rule could impact clients when funding a super life policy via rollover.
Importantly, clients should ensure they receive an acknowledgement from the super fund that the NOI has been received and valid before they access funds as outlined in section 290-170 of the ITAA 1997
Tax commissioner declined taxpayer’s request to have concessional contributions allocated to another financial year
The Tribunal agreed with the tax commissioner that the circumstances surrounding a taxpayer’s excess super contributions did not constitute ‘special circumstances’ under section 292-465 of the ITAA97. Accordingly, it held that the Commissioner's discretion should not be exercised to reallocate the excess contributions to another year.
Background
The taxpayer exceeded the concessional contributions cap for the 2019-20 financial year by $25,358.81. The taxpayer submitted an Application – excess contributions determination form seeking to reallocate the excess to the 2018-19 financial year however the Commissioner determined that special circumstances did not apply, and declined the request.
The Tribunal heard the taxpayer’s explanation that special circumstances indeed applied because:
His accountant did not provide appropriate advice regarding the timing of contributions – if he had been informed by his accountant that the contribution form submitted on 26 June 2019 may not be processed in time to ensure the amount was allocated to the 2018-19 financial year, he would not have made the contribution.
The super fund website was misleading about processing times – the super fund subsequently updated their wording about payments to make it clearer after the complaint was lodged with the Australian Financial Complaints Authority (AFCA).
The transaction processing time was out of his control.
His super balance was above the transfer balance cap, leading to an imposition of not just $5,237.51 tax but $17,156.16 tax.
He did all he could to have the transaction processed in time with the information provided to him.
Decision
The Tribunal, after reviewing the materials presented, did not accept the contentions made by the taxpayer that his circumstances constituted special circumstances for the purposes of exercising the discretion provided by section 291-465 of the ITAA 1997 to reallocate his excess concessional contributions to the earlier year.
Whilst the Tribunal agreed with the taxpayer regarding the material available regarding transaction times on the super fund website, there was nothing unusual about the time taken to process the contribution request received on 26 June 2019.
For full text of the case, see Aston and Commissioner of Taxation (Taxation) [2023] AATA 1848 (28 June 2023)
When is a contribution made?
Generally, regardless of how a contribution is made, it is taken to be received by a super fund when the contributor has done everything necessary to make the payment to the fund trustee (see TR 2010/1).
The following table summarises the ways in which funds are typically transferred and when the contribution is made.
When making contributions close to 30 June, clients should be vigilant and allow sufficient time for the contribution to actually be received.
Identifying whether special circumstances may apply
Under section 292-465 of ITAA 1997, the ATO may only exercise the discretion and make a determination in cases where it considers that:
there are “special circumstances”; and
making the determination is consistent with the objective of Division 292, i.e. to ensure that the amount of concessionally taxed superannuation benefits that a member receives results from superannuation contributions that have been made gradually over the course of the member’s life.
The ATO has, in PS LA 2008/1, set out its views of when it will exercise the discretion in section 292-465. The discretion will generally not be exercised when based upon any of the following factors in isolation:
financial hardship;
ignorance of the law;
incorrect professional advice; or
retrospectivity of the law or the adverse effect of legislative changes.
PS LA 2008/1 also refers to examples that provide guidance on how the discretion might be exercised. The examples indicate that the circumstances that are likely to be considered special are more likely to arise where the member for whom the contribution is made has no control over the timing or the amount of the contribution, and the imposition of the tax would be unfair or unreasonable. In particular:
where super guarantee contributions are made by a previous employer, causing a cap to be breached, and it is more appropriate that such contributions be allocated to another financial year;
where it is not reasonably foreseeable that a bonus will be paid and a cap may be exceeded;
where the member contributes to their fund prior to the end of the financial year, but the fund takes time to process the contribution and it is not processed until the following financial year whereupon a contribution cap is breached; or
where a member has a salary sacrifice arrangement with their employer under which they do not intend to sacrifice more than the cap in any financial year, but the timing of contributions by the employer causes them to breach a cap in a particular financial year.
Whilst there are no precise rules on what constitutes special circumstances, it broadly includes circumstances where something unusual occurred to take the member’s case, involving the making of excess contributions, outside the ordinary course of events.
Tax commissioner’s transfer balance cap (TBC) ruling was not unconstitutional
The Tribunal has ruled the tax commissioner had not gone beyond his powers in issuing a determination on a taxpayer’s total super balance exceeding the TBC stating the determination was not unconstitutional and did not unjustly deprive the taxpayer of his property.
Background
After assessing the taxpayer’s super interests, the tax commissioner issued an ‘excess balance determination’ of $254,243.39 in January 2018 in respect of period 1 July 2017 to 20 December 2017. The notice was directed to UniSuper who would redeem the amount from the taxpayers account-based pension, unless the taxpayer nominated another super interest to commute the excess from.
Despite the taxpayer’s written instruction to UniSuper, requesting the super fund not proceed with the commutation, the super fund advised the pension would be commuted on 24 April 2019 in accordance with the commutation notice.
The taxpayer disputed the tax commissioner’s power to issue a commutation notice contained within the determination that required the taxpayer to pay out the excess as a lump sum, as he argued the pensions he received were capped defined benefit income streams (CDBIS).
He argued the acquisition of his property, a pension held with UniSuper, was on ‘unjust terms’ violating section 51 of the Constitution and that CDBISs are subject to commutation restrictions and cannot result in excess transfer balances as defined in Division 294 of the Income Tax Assessment A ct 1997.
Decision
It was determined the ATO excess TBC determination did not amount to an acquisition of property under the constitution. The Tribunal ruled in favour of the ATO’s decision, stating CDBISs are still subject to a formula for calculating excess transfer balances.
For full text of the case, see Stern and Commissioner of Taxation (Taxation) [2023] AATA 2010 (4 July 2023)
Penalties for exceeding the transfer balance cap
If a client exceeds their TBC, excess transfer balance earnings will be compounded daily and credited to their transfer balance using the general interest charge (GIC) which is seven percentage points over the RBA 90 Day Bank Accepted Bill rate.
The effect of the earnings being added to the client’s personal transfer balance is that the client will have to commute a higher amount from their superannuation income stream to bring their transfer balance back within their TBC.
In addition to having to commute the excess and the notional earnings, the notional earnings are also taxed.
The tax rate is 15 per cent for the first breach. Any future breaches are taxed at 30 per cent.
Example 1
Serina purchased a $1.9 million account-based pension on 1 June 2023 (before the general TBC was indexed, so the cap that applied was only $1.7 million) and this was her first retirement phase pension. This means she is $200,000 in excess of the TBC limit. Serina rectifies this after 30 days.
Therefore, her total transfer balance equals $1,901,7271. This includes the excess earnings.
To bring her balance under her TBC of $1.7 million, Serina needs to commute at least $201,727 instead of just the $200,000 excess amount.
She will also be assessed for tax on the notional earnings at 15%, resulting in a tax liability of $259.
Importantly, while the amount of notional earnings to be commuted is set at the time the ATO sends a determination to the client, this continues to accrue in terms of the amount calculated, until the excess is rectified.
Commuting an excess amount
To commute an excess transfer balance, clients can contact their super fund and ask them to commute the excess amount. Unless they’re commuting a death benefit income stream, the excess amount can be transferred into an accumulation account or withdrawn from super as a lump sum.
If commuting a death benefit income stream, the excess amount must be withdrawn from super in the form of a lump sum as soon as practicable and it cannot be left in an accumulation account.
The commutation needs to be made by the due date set out in the determination and be for the full amount shown. If a super fund requires commutations in whole dollars and the amount to be commuted is comprised of dollars and cents, clients should round up to ensure the commutation is enough to remove the excess.
If not commuted by the due date, the ATO will send a commutation authority to the client’s super fund, even if the remaining amount is very small. Excess transfer balance tax will continue to accrue until the excess balance is commuted.
Successfully appealing non-arm’s length income (NALI)
Background
The taxpayer was a member of an SMSF with the following underlying investment structure:
The SMSF was the sole unit holder of a unit trust which the taxpayer was a director who had significant influence on all other directors. The unit trust lent money to a related entity referred to as ABC which the taxpayer was also the controlling director by influence. ABC then on-lent to a related entity referred to as DEF which the taxpayer was also a controlling director by influence. DEF then on-lent to independent third parties who undertook development activities.
The same interest rate was used on loans between the unit trust, ABC, DEF and independent third parties. However,ABC and DEF did make a modest amount of ‘handling’ profit by charging certain fees on the loans.
For example, for a loan amount of $725,000.00, DEF would receive and retain an establishment fee ($11,962.50), a mortgage sale fee (if a mortgagee sale occurs) ($36,250.00), and a discharge fee ($500.00/lot, anticipated to be 26 lots = $13,000.00). ABC would be entitled to an amount of 0.5% of the loan amount upon either discharge of the mortgage or repayment of the loan from DEF.
After auditing the SMSF, the ATO argued that the lack of margin on the interest rate paid to ABC and the Unit trust was not at arm’s length. Likewise, it was argued that ABC’s fees were “unsustainably low”.
The taxpayers argued, with support of two expert witnesses who were lawyers with experience in private lending, that it was typical to have on-lending arrangements on such terms and that the interposed entities (DEF and ABC) could be used to share the risk and that the rewards here for those intermediaries were within the reasonable bounds acceptable within the commercial market.
Decision
The Tribunal accepted the taxpayer’s arguments, and evidence, that “the scheme established under the private lending facility did not differ from that which might be expected to have operated between independent parties dealing independently with one another in the private lending market at the time”. As such the AAT found that NALI was not triggered.
For full text of the case, see BPFN and Commissioner of Taxation (Taxation) [2023]AATA 2330 (28 July 2023)
Non-arm’s Length rules
The burden ultimately rests on the SMSF to prove that each step in the chain of generating income is consistent with an arm’s length dealing. Evidence can include:
Statements from independent relevant experts;
Explanations from the ‘controlling mind’ between the entities; and
Accountants and solicitors acting for the entities.
Evidence from solicitors with experience in areas such as NALI and SMSF laws can also be very useful. The SMSF should also ensure that each step is properly documented e.g. formal written loan agreements should include reference to any benchmarking used to determine the amount charged etc.
It is important the SMSF have sound commercial reasons for their structures and those reasons should also be explainable to third parties.
Whilst the case did not raise issues with the in-house asset rules, it is relevant that any SMSF’s with similar structures, where the SMSF is the sole unit holder of a unit trust, ensure it has complied with the in-house asset rules and any other regulatory requirements.
Regulatory update
Transfer balance cap changes to address super fund mergers and capped defined benefit income streams
The Minister for Financial Services, Stephen Jones has issued a media release announcing the Government’s intention to amend the transfer balance cap legislation.
Applying retrospectively from 1 July 2017, proposed changes aim to ensure members with a capped defined benefit income stream are not adversely affected by a merger or successor fund transfer between super funds.
This proposal aims to amend current legislation which results in a member’s transfer balance cap being unintentionally impacted due to the original income stream producing a credit that can result in a higher valuation for some members.
Social security Work Bonus enhancements and Employment nil rate period changes
Introduced on 18 October 2023, Social Security and Other Legislation Amendment (Supporting the Transition to Work) Bill 2023 contains the following proposals:
From 1 January 2024, the temporary $4,000 credit to the Work Bonus Bank due to expire on 31 December 2024 will become permanent. Pensioners from 1 July 2024 will have access to $11,800 in total
From 1 July 2024, the employment income nil rate period will be doubled from 12 fortnights to 24 fortnights, to reduce barriers for income support recipients to take up work by allowing them to retain concession cards and other supplementary benefits for a longer period. This change will apply to recipients of JobSeeker, Youth Allowance, Austudy, ABSTUDY, Parenting Payment, Age Pension, Disability Support Pension and Carer Payment.
What is the employment nil rate period?
A recipient whose social security pension or benefit is not payable because of ordinary income, made up entirely or partly of employment income, may qualify for an employment income nil rate period. During this period the recipient is considered to be receiving a social security pension or benefit ONLY for the purposes of qualifying for the following:
child care subsidy
for the purposes of Rent Assistance payments to their partner, have their partner treated as if both members of the couple are receiving a social security pension or benefit
for the purposes of applying the allowance income test to their partner, have their partner treated as if both members of the couple are receiving a social security pension or benefit
these supplementary benefits
language literacy numeracy supplement
approved program of work supplement
pensioner education supplement
telephone allowance, or
retain their Health Care Card or Pensioner Concession Card.
If during an employment income nil rate period the recipient's income falls and their social security pension or benefit becomes payable again, the recipient's payment will recommence.
For more information, refer to 3.1.12 Employment income nil rate period.
Payday super reforms in consultation
Announced in the May 2023 Federal Budget, the Government will require all employers to pay their super guarantee (SG) at the same time as salary and wages from 1 July 2026. Currently in consultation, the paper addresses:
The increased frequency in payment of the SG – a start date in 2026 is designed to enable employers, digital service providers, super funds and other impact stakeholders the opportunity to make necessary system changes to accommodation the increased frequency of SG contributions, and
The Government’s intention to step up investment in the ATO’s data matching capabilities to increase SG compliance. From 2023, the ATO will invest in creating a new unified database which matches STP data from employers and Member Account Transaction Service (MATS) data from super funds at scale.
The closing date for submissions is 3 November 2023.
Draft legislation: Additional 15% tax on earnings corresponding to a client’s total super balance over $3M
Consultation recently closed regarding the Governments proposal to apply an additional 15% tax on super earnings corresponding to a client’s total super balance over $3m from 2025-26 (Division 296 tax).
The Bill largely reflects the initial proposal regarding how this tax will be calculated and levied:
A member’s superannuation earnings for a financial year are generally calculated as their total superannuation balance at the end of the year (adjusted for withdrawals and contributions made during the year) less their total superannuation balance at the end of the previous year (negative earnings can be carried forward to offset future earnings)
The portion of a member’s superannuation earnings subject to Division 296 tax in a financial year is calculated by multiplying those earnings by the proportion of their total superannuation balance at the end of the year that is above $3 million.
Division 296 tax is levied on the individual member and due 84 days after a notice of assessment is issued. The member can choose to pay the tax personally or have it released from one or more eligible superannuation interests. Debt deferral arrangements will apply for defined benefit interests.
Members who have ever made structured settlement contributions or who die during the year will not have to pay Division 296 tax for a year.
The Bills also propose to modify the definition of total super balance in a way that removes the link between a member’s transfer balance account and calculation of their total super balance. Regulations are needed to clarify how some interests will be valued e.g. defined benefit pensions. This change would apply from immediately before 1 July 2025 and apply for all purposes which total superannuation balance is relevant e.g. determining non-concessional cap.
A member’s total super balance would still be reduced by structured settlement contributions made. Certain LRBA amounts are not included in a member’s total superannuation balance for Division 296 purposes but will remain included for other purposes.
Changes ahead for AFSLs’ breach reporting
Under the current regime, Australian financial services licensees (AFSLs) are automatically required to submit notifications to ASIC about those reportable situations which are deemed to be ‘significant’.
Changes from 20 October will exclude certain breaches of the misleading or deceptive conduct provisions in subsection 1041H(1) of the Corporations Act or subsection 12DA(1) of the Australian Securities and Investments Commission Act 2001 (ASIC Act) and the false or misleading misrepresentations provision in s12DB(1) of the ASIC Act from being deemed significant breaches of a core obligation and therefore automatically reportable.
To qualify for the exclusions, the relevant breach must:
Only impact one person or, if it relates to a financial product, credit product, consumer lease, mortgage or guarantee that is, or is proposed to be, held jointly by more than one person, those persons;
Not result in, and be unlikely to result in, any financial loss or damage to any person (regardless of whether that loss or damage has been, will be or may be, remediated); and
Not give rise, and be unlikely to give rise, to any other reportable situation.
ASIC gave the example of a breach where a staff member incorrectly advised a customer about the amount of daily external transfer that they are permitted to make during a phone call and correcting the error on the same call in circumstances where there is no actual or anticipated financial loss to the consumer.
A second change effective from 20 October will increase the time period given for AFSLs to report a breach if it is similar or the same to a breach that has already been reported.
AFSLs will now be given 90 days, up from 30 days, from when they first know there are reasonable grounds to believe that a reportable situation, to lodge a report with ASIC, if the situation has underlying circumstances that are same or similar to a situation that has already been previously reported.
Disclaimer: The information provided is current as at 30 October 2023 and is subject to change. This article is not cliental financial, taxation or legal advice and should not be relied on as such. Any advice in this document is general advice only and does not consider the objectives, financial situation or needs of any client. You should obtain specialist financial, taxation or legal advice relevant to your circumstances before making investment decisions. Aged care and social security rates and thresholds valid at 20 September 2023. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd (‘AUPFS’) does not guarantee the accuracy or completeness of it. Where an article is provided by a third party any views in that article are the views of the author and not of AUPFS. AUPFS does not guarantee any outcome or future performance. Australian Unity Personal Financial Services Ltd ABN 26 098 725 145, AFSL No. 234459. This document produced in November 2023. ©
