Edited version of administratively binding advice

Authorisation Number: 1012413723463

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Advice

Subject: Excess contributions tax - Concessional contributions

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 all or part of your concessional or non-concessional contributions for the relevant financial year, for the purposes of excess contributions tax?

Advice

Yes, please see Reasons for decision below.

This advice applies for the following period:

Year ended 30 June 2013

The arrangement commences on:

1 July 2012

Relevant facts and circumstances

Your advice is based on the facts stated in the description of the scheme that is set out below. If your circumstances are significantly different from these facts, this advice has no effect and you cannot rely on it. The fact sheet has more information about relying on ATO advice.

The member initially commenced employment with the employer in late XXXX.

The employer is a wholly owned subsidiary of an overseas listed company.

The superannuation fund is a self managed superannuation fund (SMSF)

The member is under 50 years of age

The member was seconded to the overseas headquarters for a period of Y months.

The member was subject to all of the relevant overseas country's tax obligations, including those relating to many varied forms of retirement contributions that are deducted from an employee's earnings.

At the time of the members transfer overseas there was no tax equalisation policy in place.

The member returned to Australia and became an employee of the same Australian company, since that time the member has been making concessional superannuation contributions in the order of $XXX to $XXX per annum.

As there was no tax equalisation policy between the Australian employer and the overseas employer, the overseas employer did not continue to make concessional superannuation contributions on your behalf during the period of secondment.

Upon the member's return to Australia, the member attempted to arrange for the cumulative overseas retirement contributions to be transferred to the Australian SMSF.

It became apparent that this was not possible pursuant to the relevant overseas country's law.

The employer have advised that they will make a catch up contribution based on the 9% minimum contribution that would have been payable had the member remained an employee of the Australian subsidiary.

The member's employer will fund the shortfall arising on the basis that the member can not receive contributions made to the overseas country's pension scheme.

It is the member's understanding that the only way to be granted access to the overseas country's contributions is if the member become a resident and retired in that country.

The member is an Australian citizen and has no intention or expectations of returning overseas to retire.

The member is therefore being compensated in the relevant income year, for the years of lost overseas pension contributions during the period of secondment.

The members current level of concessional superannuation contributions are close to $XXX per annum which leaves no capacity to make a catch up contributions over a number of years.

The member is concerned that the payment of the catch up contribution and the existing level of superannuation concessional contributions in the current financial year will create an excess contributions tax liability in the relevant financial year.

As the previous years are being rectified in the relevant financial year, an excess contributions tax assessment would arise as the member would have exceeded the concessional contributions cap of $25,000.

The member requests that the Commissioner make a written determination allowing the additional concessional contributions to be made in the current financial year, without the imposition of excess contributions tax.

This will not advantage the member by allowing additional concessional contributions to be received, as it is only rectifying prior years where no contributions were received.

The member has provided a letter from the employer regarding the employer superannuation guarantee contributions (SG) calculations that they propose to make as catch up contributions if the member had worked in Australia continuously. Relevant information from this letter is as follows:

· During the period of the member's transfer overseas no superannuation contributions, were made on behalf the member by Australia, nor were any contributions paid by the overseas subsidiary into the SMSF.

· The member became part of the overseas payroll system and under that had amounts paid into the country's pension scheme.

· The employer was of the view that the member would be entitled to retrieve payments made on the member's behalf in the overseas country, however there is no treaty between Australia and overseas country for superannuation and the monies that were paid are therefore 'lost'.

· The member is the first person who has transferred and returned to the Australian entity and this has somewhat disadvantaged the member as the member has had continuity of service with the one company.

· As a consequence, the employer wishes to rectify this situation of the lost superannuation monies to the overseas Government and are working on a catch up for the member based on superannuation contributions that would have been paid had the member continued to work in Australia.

· There is an interim period that the employer needs to rectify.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 292-25

Income Tax Assessment Act 1997 Section 292-465.

Reasons for decision

Summary

Based on the facts provided it is considered that special circumstances exist in the member's case and it would be consistent with the object of Division 292 of the ITAA 1997 to reallocate the amount of the proposed payment of your concessional contributions from the relevant financial year to the W, X, Y and Z financial years as appropriate, for the purposes of excess contributions tax.

Detailed reasoning

For the purposes of ECT, concessional contributions are defined in section 292-25 of the ITAA 1997. Generally, the concessional contributions of an individual are those contributions that are:

(i) paid to a superannuation fund for the benefit of that individual; and

(ii) included in the fund's assessable income - subsection 292-25(2) of the ITAA 1997.

Superannuation contributions made for or by an individual are subject to annual contributions caps. The cap amount depends on whether the contributions are concessional or non-concessional.

Concessional contributions include but are not limited to contributions your employer makes for you, including contributions made under a salary sacrifice arrangement.

Section 292-465 of the ITAA 1997 gives the Commissioner the discretion to disregard or reallocate all or part of your concessional or non-concessional 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 gradually made over a person's lifetime.

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. The Commissioner can only exercise the discretion to reallocate the excess amount of non-concessional contributions where it is considered that there are 'special circumstances'.

The courts have considered what 'special circumstances' means in many different contexts. It is clear from case law that special circumstances are circumstances which are unusual or out of the ordinary. By definition, most circumstances are not 'special circumstances'. Australia's courts have made it clear that 'special circumstances' are limited to circumstances that make a case different from the ordinary or usual case. Circumstances are only special if the ordinary application of the law would provide a result that is manifestly unjust, unfair or otherwise inappropriate. We must apply the same approach as adopted by the courts when we make our decisions.

Practice Statement Law Administration PS LA 2008/1 The Commissioner's discretion to disregard or reallocate concessional and non-concessional contributions for a financial year (PS LA 2008/1) provides guidance on what the Commissioner may or may not consider special circumstances and highlights that:

· it is not possible to lay down precise rules for what constitutes special circumstances

· the core idea of special circumstances is that there is something unusual to take the case outside the ordinary course, and

· in determining whether there are special circumstances in the context of the exercise of a discretion, a decision maker must bear in mind the purpose for which the discretion is given.

In reviewing your case we have looked at PSLA 2008/1 in particular the following paragraphs:

22. There are two preconditions to a determination exercising the discretion under section 292-465:

 the presence of 'special circumstances', and

 the determination achieving an outcome which is consistent with the object of Division 292.

Special circumstances

23. The meaning of the expression 'special circumstances' has been considered in case law in a variety of legislative contexts. The principles that emerge from the cases are that:

· it is not possible to lay down precise rules for what constitutes special circumstances

· the core idea of special circumstances is that there is something unusual to take the case outside the ordinary course, and

· in determining whether there are special circumstances in the context of the exercise of a discretion a decision maker must bear in mind the purpose for which the discretion is given.

24. The approach to special circumstances in the context of section 292-465 is confirmed by the EM to the Bill which introduced the amendments. At paragraph 1.117 it says:

It is clear from the case law that special circumstances are unusual circumstances, or circumstances out of the ordinary. Whether circumstances are special will vary from case to case as the context requires, but in this context they must make it unjust, unreasonable or inappropriate to impose the liability for excess contributions tax.

25. In determining whether there are special circumstances in a given case, a decision maker should consider whether there are circumstances which are outside the ordinary course. In deciding whether the circumstances are outside the ordinary course, it is highly relevant whether the imposition of the excess contributions tax would be unjust, unreasonable or otherwise inappropriate.

26. Because a determination for the purposes of excess contributions tax may relate not only to completely relieving or excusing liability for excess contributions tax for a period, but also to allocating contributions to another year, the effect of allocating contributions to another year or, of not doing so, must also be considered in judging whether an imposition of liability in the circumstances of a particular case is appropriate or whether it is at odds with the object or purpose of the law.

The decision in McMennemin & Anor v FC of T [2010] AATA 573 outlines previous authorities on the meaning of 'special circumstances' and goes on to state that the tribunal's decision is consistent with the Commissioner's explanation of special circumstances in PS LA 2008/1.

Therefore, 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 decision to issue a determination the Commissioner may have regard to whether:

· it was reasonably foreseeable when a relevant contribution was made, that you would have excess non-concessional contribution for the relevant year

· the extent to which you had control over the making of the contribution

· there are any other relevant matters

Whilst we recognise you do not intend to exceed the contributions cap, such intent alone does not establish 'special circumstances'. ECT is simply a consequence of a financial transaction.

Application to your circumstances

When reviewing the application we have considered the following information:

· The member joined the Australian employer in late XXXX.

· 9% SG contributions were paid to the Australian superannuation fund by the employer up until the secondment overseas.

· The member transferred overseas and was paid out of the overseas payroll office until the member returned to Australia and resumed duties in Australia. From this point on the 9% superannuation guarantee contributions recommenced to the SMSF.

Whilst on secondment, the member was subject to all the relevant overseas country's taxation obligations which included those relating to retirement contributions that are deducted from an employee's earnings.

During the period of transfer overseas, no superannuation contributions were made to the SMSF. Amounts were paid into the overseas country's pension scheme.

The member was the first employee who has transferred from and returned to the Australian entity and this situation has put the member at a disadvantage as they have had continuity of service with the one company having worked both overseas and in Australia. There is no certificate of coverage agreement with the overseas country and therefore this puts the member at a further disadvantage with regards to superannuation monies paid to the overseas pension scheme.

Under the relevant overseas country's law the only way that the member could be granted access to the contributions made on their behalf is if they become a resident and retire in the relevant country. The member is an Australian citizen as are the family and their neither intention nor expectation of returning to overseas to retire.

From the information provided in the application together with that from the employer it is clear that the member has been severely financially disadvantaged by the fact that they are unable to transfer the superannuation contributions made to the overseas pension scheme.

Based on the facts provided it is considered that special circumstances exist in this case and it would be consistent with the object of Division 292 of the ITAA 1997 to reallocate the proposed amount of concessional contributions from the relevant financial year to the relevant financial years as appropriate, for the purposes of excess contributions tax.

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