Superannuation

A new measure to allow superannuation funds to pay back or refund certain “concessional” contributions (generally contributions made by an employer) is unfortunately limited to situations where the normal cap on these contributions ($25,000 for most people but $50,000 for people over 50) is exceeded by a small amount ($10,000 or less), on a once-off basis some time from 2011-12 onwards.

“I’ve changed my mind”

I say “unfortunately” because I suspect most of us would love to be able to refund contributions we have made sometimes. Certainly, if we change our mind and decide we actually want the money it would be lovely to be able to have it back. Perhaps more importantly, those who have contributed more than the relevant limits would love to say to the trustee of their fund: “Actually, rather than telling the ATO about these contributions – which will see me getting a big tax bill – why don’t you just give me the money back and we can forget all about it?”

It’s worth remembering, though, that there is another important scenario where contributions can be given back to the person who contributed them.

When a contribution must be refunded

In fact, a contribution must be refunded any time it is made for someone who is not allowed to have it.

A simple example here is contributions that are made for someone over 65. These are only allowed if the member meets a particular work test. If they make a contribution but haven’t met that test, the fund is under a legal obligation to refund the contribution. In fact, it has to do so within 30 days and if it does so later, the fund has broken yet another law.

Illegal contributions

It’s difficult to see how this could end up being useful until we think about all the sorts of contributions that are against the law.

One of these is particularly big contributions made in a single payment, e.g. one cheque or electronic fund transfer.

In simple terms, no one is allowed to contribute more than $450,000 to superannuation in a single transaction.

There are some exceptions for people making contributions for which they claim a personal tax deduction, people who have received a disability pay out that they are allowed to put into super without the usual restrictions applying and those who have sold a small business and are eligible for some special tax rules. But let’s ignore those for the moment.

Make the legislation work for you

So how could that be useful?

Imagine the plight of someone who has contributed $600,000 of their own money to super – not realising that every dollar over $450,000 was going to be taxed at the highest marginal tax rate. At first glance, they face a $70,000 tax bill. They would be delighted to learn that as their fund is not actually allowed to accept a single contribution of more than $450,000, they can have the rogue $150,000 paid back and avoid the tax bill. (The equivalent limit is lower – only $150,000 – for people over 65 at the start of the year, but the principle is the same.)

Perhaps a more realistic scenario is a couple of who have deposited $900,000 from their personal bank account into super. In the back of their minds was a plan to have $450,000 added to each of their accounts in the fund but so far they haven’t told the trustee how this contribution should be allocated between them (they have until the 28th of the following month to do this).

When they made the contribution, they forgot that one of the members (the husband) had already contributed $200,000 the year before. Or perhaps they knew full well they had made that contribution in the previous year but hadn’t realised that it had ongoing implications for the current year.

If the $900,000 is just divided between them, the husband will exceed his limit on these types of “non-concessional” contributions by $200,000 and will pay over $90,000 in tax.

When the trustee has no choice

What if they instead informed the trustee that only $250,000 of the contribution should be allocated to the husband, with the remaining $650,000 going to the wife? The trustee of the fund would have no choice but to refund some of the amount allocated to the wife – everything over $450,000 (in this case, $200,000). The great thing about following this rule is that it removes the problem tax bill.

In other words, for once superannuation legislation can actually work to help reduce a tax bill.

Of course, wouldn’t it be more sensible to simply be allowed to refund the $200,000 on the basis that it was a mistake? (The couple would obviously never have contributed the $900,000 in the first place if they had remembered their previous year’s contribution or understood its implications.) Absolutely. Unfortunately the law doesn’t specifically accommodate refunds like this and the ATO’s current position is that it’s not allowed. I suspect that we will need a court case to change their view.

Meg Heffron is technical services manager at Heffron and was one of seven panellists on the Cooper Review.