Fund rules intended to prevent excess contributions tax
In Taxpayer Alert TA 2010/2, we highlighted issues concerning the governing rules in some superannuation funds which are designed to prevent a member from becoming liable to excess contributions tax (ECT). Having reviewed these arrangements, we have withdrawn the taxpayer alert. This page explains our approach to fund rules of this kind.
If a trustee of a super fund receives a payment described as a contribution, the trustee must promptly consider whether the payment is in fact a contribution.
This involves considering whether the amount is paid to them to hold in their capacity as trustee of the fund. The trustee must consider whether, if they accept the payment, the amount would, under the terms of the fund's governing rules, form part of the capital of the fund.
Taxation Ruling TR 2010/1 explains our view on what a 'contribution' is for income tax and regulatory purposes. A 'contribution' is anything of value that increases the capital of a super fund where the purpose of the person who provides it is to benefit a particular member, a group of members or all the members generally.
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In dealing with a payment received, trustees must act consistently with the super regulatory law and governing rules of the fund. If a payment is a contribution, it must be accounted for as such. Payments which are not to form part of the capital of the fund cannot be contributions and cannot be accounted for as such or intermingled with the assets of the fund.
It is therefore not open to trustees to deposit amounts received to the fund's bank account, and otherwise treat the amounts as contributions, without taking due care to determine whether the amounts in fact form part of the capital of the fund.
Trustees must consider whether a payment is a contribution as soon as, or shortly after, the payment is received.
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A trustee who treats amounts as contributions without due care to determine whether the amounts are contributions, on the basis that any issues may be resolved by reference to the super fund's governing rules in the event of an audit, would not act consistently with the trustee's duties as trustee.
The Commissioner considers that trustees must be aware of their duties as trustee under the terms of the super fund's governing rules, the super regulatory law and trust law, and act in accordance with those duties.
If a trustee intermingles amounts with the fund's assets, without proper consideration of whether the amounts form part of the fund, the Commissioner may take this into account in determining whether the person is a fit and proper person to be a trustee of a self-managed super fund.
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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.
Trustees who are uncertain about the effect of the super fund's governing rules should seek independent advice.
Where a payment to the trustee is a contribution, its character as a contribution is not affected by any subsequent actions taken by the trustee. The contribution will be preserved as a super benefit of the member.
A trustee will be in breach of the super law if they pay an amount received as a contribution for a member (or earnings attributable to it) to that member without a condition of release being satisfied.
If a trustee pays a member's super benefits to the member without ensuring the member has satisfied a condition of release, the super benefit will be assessable income of the member and taxed at their marginal rate of tax.
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In considering whether a fund should be made non-complying for regulatory and tax purposes, the Commissioner will take into account whether the trustee has paid super benefits to members in contravention of the super law.
Any payment, or part of a payment, which the trustee of a super fund retains, despite the amount not forming part of the fund under the super fund's governing rules, will generally be an asset of a different trust, separate or distinct from the super fund. This will be so whether or not the fund's rules expressly provide for such amounts to be held under a separate trust and even if the trustee treats the payment as a contribution in the fund's records, contrary to the rules of the fund.
The trustee must keep the money and other assets of the super fund separate from the trustee's personal assets and the assets of any other trust.
The trustee should act promptly to either:
- return any amount described as a contribution but which, under the governing rules, does not form part of the fund to the person who paid it
- separate the relevant amount from the assets of the super fund.
A trustee who intermingles an amount that does not form part of the super fund with the money or assets of the fund will be in breach of their obligations under the super regulatory law and trust law.
The trustee must not treat any payment, or part of a payment, which does not form part of the super fund as a contribution for the purposes of the:
- income tax law
- operating standards of the super law - in particular, the contributions and payment standards
- statement of contributions which the trustee is required to give to the Commissioner.
The beneficiary of the separate trust must properly account for income tax on income from the separate trust. The payer cannot deduct a payment on the basis that it is a super contribution if the fund's governing rules prevent the amount from being a contribution.
Taxpayers who do not account for these obligations in accordance with the terms of the super fund's governing rules may be exposed to penalties and interest. Additionally, records which wrongly treat amounts as forming part of the super fund rather than a separate trust would not meet the record-keeping requirements of the income tax and super law.
Where a trustee holds any payment on a trust which is separate from the super fund, it must account to the payer for any income or expenses associated with that trust separately from those of the super fund. The assets of the super fund cannot be used to meet expenses of the separate trust.
Penalties can apply where a person:
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- fails to disclose income earned from money held for them on a separate trust
- claims a tax deduction they are not entitled to claim
- fails to keep accurate records.