Edited version of administratively binding advice

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Administratively Binding Advice - Excess concessional contributions tax

Question

Based on the facts provided, do special circumstances exist and would it be consistent with the object of Division 292 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard or reallocate an amount of your concessional contributions made in the 2009-10 financial year for the purposes of excess contributions tax?

Answer

Based on the facts provided special circumstances do not exist and it would not be consistent with Division 292 of the ITAA 1997 to disregard or reallocate an amount of your concessional contributions made in the 2009-10 financial year for the purposes of excess contributions tax.

This advice applies for the following period/s:

Year ended 30 June 2010

The arrangement commenced on:

1 July 2009

Relevant facts and circumstances

You have an effective salary sacrifice agreement with your employer whereby you agreed to salary sacrifice a portion of your wages to superannuation.

Early in 200X, you were advised by your employer's salary packaging officer that an adjustment had been made to your salary sacrifice contribution whereby from June 200X, your salary sacrifice contributions had been reduced in order to comply with the concessional contributions cap.

You have stated that you requested your employer's pay officer to determine your contributions so that for equal deductions each pay, you would contribute within the contribution limits.

Later in 200X, your employer's salary packaging officer advised that due to the reduction in the concessional contributions cap for the relevant financial year, you should consider ceasing your salary sacrifice contributions in order to comply with the new concessional contributions cap.

Based on the advice received from your employer's salary packaging officer, you ceased to make salary sacrifice contributions. .

Near the end of the 200X income year, your superannuation fund wrote to you and indicated that based on the contributions they had received on your behalf, you may exceed your concessional contributions cap of $50,000 for the recent financial year.

In late 200X, your employer notified you of a requirement for you to clear your leave entitlements.

Subsequently, you notified your employer that you wished to clear your outstanding leave by taking a number of weeks leave, on a specific rate of pay, in late 200X.

Your excess concessional contributions arose as a result of your employer requesting you to take outstanding leave.

Late in that income year, you wrote to your employer seeking a deferral on the payment of your superannuation guarantee contributions for a number of pays for that year to the next financial year when you found out that you would be exceeding the concessional contributions cap.

Your employer advised it must comply with your superannuation fund's regulations, which require contributions to be made on a fortnightly basis and the ATO rules covering the payment of the 15% employer contribution tax.

In the subsequent income year the ATO requested the following further information from you:

· A copy of the contribution statement from your superannuation fund outlining the dates, amounts and type of contributions (for example, employer, personal, salary sacrifice contributions) that had been made to your superannuation fund in the relevant financial year.

· The date you were first notified by your employer that you had to take your outstanding leave including any supporting information/relevant documents relating to the notification.

· A copy of your salary details for the relevant period which provided your salary sacrifice and superannuation guarantee contributions.

Both you and your employer could not locate the date you were notified by them of the requirement to take your outstanding leave. You have stated this could be due to the computers not archiving anything that is more than six months old.

You have stated that it is your custom to respond, as far as possible, within a day or so to all administrative matters. Consequently it is most probable that the request to take leave was received within a few days before your response of late 200X.

Reasons for decision

Summary

Based on the facts provided, special circumstances do not exist and it would not be consistent with the object of Division 292 of the ITAA 1997 to reallocate or disregard an amount of your concessional contributions contributed in the relevant financial year for the purposes of excess contributions tax.

Detailed reasoning

A person who receives an excess contributions tax assessment may apply to the Commissioner for a written determination that all or part of their concessional or non-concessional contributions for a financial year are to be disregarded or allocated to another financial year, for the purposes of the excess contributions tax.

Concessional contributions are generally contributions made by or for an individual to a complying superannuation plan that are included in the assessable income of a fund. They include employer contributions (including contributions made under a salary sacrifice arrangement) and personal contributions for which the individual has claimed an income tax deduction.

However, the application can only be made after the person has received an excess contributions tax assessment for the financial year. The application must be made in the approved form within 60 days of receiving the assessment, or such longer period as the Commissioner allows.

Although the Commissioner is unable to consider making the determination prior to an assessment issuing, we are providing administratively binding advice in response to your request. You may wish to request the Commissioner to consider making a determination after you have received an excess contributions tax assessment for the relevant financial year.

Section 292-465 of the ITAA 1997 gives the Commissioner the discretion to disregard or allocate to another financial year all or part of a contributions for the purposes of excess contributions tax. The Commissioner may make such a determination if he considers that there are special circumstances, and that making the determination is consistent with the object of Division 292 of the ITAA 1997.

The object of Division 292 of the ITAA 1997 is to ensure that the amount of concessionally taxed superannuation benefits that a person receives results from contributions that have been made gradually over a person's lifetime.

The courts have considered what 'special circumstances' means in many different contexts. As confirmed by the Explanatory Memorandum to the Bill which introduced the amendments, it is clear from case law that special circumstances are circumstances which are unusual or out of the ordinary. Whether circumstances are special will vary from case to case, however in this context they must make it unjust, unreasonable or inappropriate to impose the liability for excess contributions tax.

When making a determination the Commissioner may have regard to whether:

· an amount of your concessional contribution made in the 2009 -2010 financial year would be more appropriately allocated to a different financial year (or should be disregarded); and

· it was reasonably foreseeable when the contributions were made that there would be an excess concessional contribution amount for the financial year.

Where the contribution is made by another person, the terms of any agreement or arrangement covering the amount and timing of the contribution will be relevant. Another consideration is the extent of the individual's control over the making of the contribution.

Practice Statement Law Administration PS LA 2008/1 provides guidance to ATO officers on how to exercise the Commissioner's discretion to disregard or reallocate concessional or non-concessional contributions for a financial year,

Paragraphs 22 to 26 of PS LA 2008/1 explain the meaning of special circumstances and specify that special circumstances are unusual circumstances or circumstances which are out of the ordinary. Whether circumstances are special varies from case to case but for the purposes of the excess contributions tax they must make it unjust, unreasonable or inappropriate for a liability for excess contributions tax to be imposed.

Paragraph 35 of PS LA 2008/1 provides a list of factors which in isolation would not generally amount to 'special circumstances'. These include but are not limited to financial hardship, ignorance of the law, incorrect professional advice and retrospectivity of the law or adverse effect of legislative changes.

In relation to claims that a person was ignorant of the law, it states:

…a claim that a person was ignorant of the law would not, generally speaking be regarded as special circumstances unless other factors exist which would make the ignorance or misconception reasonable or understandable in the circumstances, such as where incorrect advice was provided by the Tax Office.

Paragraph 35 of PS LA 2008/1 further provides that incorrect professional advice would not generally amount to special circumstances, unless there are other special factors leading to the mistake (for example, where the incorrect advice was based on a widely understood view of the law that was ultimately found by a court to be incorrect), adding:

However the mere fact 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.

These statements make it clear that a mere error or mistake (for example, in the amount, timing or calculation of contributions) does not generally constitute 'special circumstances' unless there are extenuating factors involved - that have either led to the error/mistake or make it reasonable or understandable in the situation.

Factors that may be considered when deciding whether special circumstances exist include:

· whether the contribution would more appropriately be allocated towards another financial year;

· the terms of any agreement or arrangement covering the amount;

· timing of the contribution; and

· the extent to which the person had control over the making of the contributions.

The concessional contributions cap for the relevant financial year applicable to you is $50,000.

In your case, you had entered into an effective salary sacrifice arrangement (SSA) with your employer. Under the terms of the agreement you salary sacrificed a portion of your wages each fortnight to super. In addition, your employer also made superannuation guarantee contribution of on your behalf.

You have stated that you requested your employer's pay officer to determine your contributions so that for equal deductions each pay, you would contribute within the contribution limits.

In late 200X, your employer's salary packaging officer advised that you should consider ceasing your salary sacrifice contributions in order to stay within the concessional contributions cap for the relevant financial year. Based on the advice received, you ceased to make salary sacrifice contributions late 200X.

You have stated that in late 200X, your employer notified you of a requirement for you to clear your leave entitlements. Subsequently, you notified your employer that you wished to clear your outstanding leave by taking leave for a specific pay rate, in 200X .

Your excess concessional contributions arose as a result of your employer requesting you to take leave. In particular, because of your taking your particular leave at specific pay. This has effectively resulted in your employer making increased superannuation guarantee contributions on your behalf for the time you were on leave.

You have stated you were aware of the need to keep your contributions within the contribution limits and had taken reasonable steps to do so. The evidence you have provided clearly indicates that you took steps to remain within the concessional contributions cap by requesting your employer's pay officer to determine your contributions so that for equal deductions each pay, you would contribute within your contribution limits. It would appear however, that the calculation of the amount of salary sacrifice contribution did not adequately or accurately consider the reduced cap amount of $50,000.

As your employer was bound by superannuation guarantee legislation they were required to make superannuation guarantee contributions on your behalf for this period of employment, in addition to the superannuation guarantee contributions they were required to make on your leave pay. This caused your employer contributions to be inflated for the period of time in question. However, this inflated amount of employer superannuation guarantee contributions was a direct result of the option you chose to receive your particular leave in the manner in which you did.

It was reasonably foreseeable that by electing to take your leave in the manner that you did (at specific pay rates), that you would receive a commensurate higher level of superannuation guarantee contributions. At the time you made your decision to take your leave in the manner that you did, you had ample time to adjust your salary sacrifice contributions in a more timely manner to ensure that you would not exceed your concessional contributions cap. The fact that you did not turn your mind to the fact that by taking your leave in the manner that you did and fail to adjust your salary sacrifice contributions in a more timely manner to ensure you did not exceed the concessional contributions cap is not 'special circumstances'.

The reasonably foreseeable test is determined on an objective basis that assumes a taxpayer will have an accurate knowledge of the amounts of the concessional contributions cap and the way in which caps work. A misunderstanding, or incomplete understanding, of the law, inadvertence or error, generally speaking, would not be regarded as special circumstances.

The legislative intent of excess contributions tax is to tax contributions, made on your behalf, which exceed the relevant contributions cap in a financial year. It is only if there are special circumstances that the Commissioner can exercise the discretion to disregard or reallocate amounts of concessional or non-concessional contributions to change the liability that would otherwise be incurred. Whilst we recognise that you did not intend to exceed the concessional contributions cap for the relevant financial year, intent alone does not establish special circumstances. Excess contributions tax is not a penalty, but a consequence of a financial transaction.

Given that the intent of the law is for excess contributions in a financial year to be subject to excess contributions tax, the Commissioner does not regard the imposition of the tax as unjust, unreasonable or inappropriate, in these circumstances.

Consequently, the facts of your case are not sufficiently 'unusual or out of the ordinary' to constitute special circumstances and it would be inconsistent with the object of Division 292 of the ITAA 1997 to disregard, or reallocate to another financial year, all or part of your excess concessional contributions for the purposes of excess contributions tax. It follows that the Commissioner will not exercise the discretion under section 292-465 of the ITAA 1997.

However, should you receive an excess contribution tax assessment you may apply to the Commissioner to issue a determination to disregard the contributions at that time. Please include a copy of this letter with your application.

When the time comes to consider your application, that law as it then exists must be applied to the facts as established at that time.

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