Edited version of administratively binding advice

Authorisation Number: 1011798434346

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Advice

Subject: Excess 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 the amount of your potential excess non-concessional contribution for the 2010-11 financial year?

Answer:

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 disregard the amount of your potential excess non-concessional contribution for the 2010-11 financial year.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This 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 Tax Office advice.

Your advice is based on the following facts.

· We received your Private ruling application form together with the following enclosures:

§ detailed grounds for the request for Commissioner's discretion,

§ a copy of a Court application,

§ a table detailing your approximate expenditures, and

§ a copy of graphs detailing your capital projections under your current situation and under the proposed situation where you establish a self-managed superannuation fund (SMSF).

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 292-1

Income Tax Assessment Act 1997 Section 292-5

Income Tax Assessment Act 1997 Section 292-95

Income Tax Assessment Act 1997 Section 292-465

Reasons for decision

Summary

The Commissioner considers that the facts of your case do not demonstrate circumstances which are sufficiently unusual or out of the ordinary to be considered special circumstances.

Consequently, the Commissioner will not exercise the discretion under section 292-465 of the ITAA 1997 to disregard your proposed excess non-concessional contribution for the 2010-11 financial year.

Detailed reasoning

The law allows a person to apply to the Commissioner to make a written determination that all or part of an individual's concessional or non-concessional contributions for a financial year are to be disregarded or allocated to another financial year.

However, this application can only be made after the person has received an excess contributions tax assessment for the financial year or after all of the contributions sought to be disregarded or reallocated have been made. If an excess contributions tax assessment for the financial year has been issued, the application is required to be made within 60 days of receiving the excess contributions tax assessment, or such longer period as the Commissioner allows.

Although the Commissioner is unable to consider making the determination prior to an assessment issuing or before all of the contributions sought to be disregarded or reallocated have been made, we are providing administratively binding advice in response to your request on whether there are special circumstances under which the Commissioner may consider making a determination to disregard any excess non-concessional contributions you are currently contemplating on making.

You may wish to request the Commissioner to consider making a determination after you have received an excess contributions tax assessment or after all of the contributions sought to be disregarded or reallocated have been made.

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 contributions.

Non-concessional contributions include but are not limited to personal contributions for which you are not allowed an income tax deduction, and contributions in excess of the concessional contributions cap.

The non-concessional contributions cap is the amount that is three times the concessional contributions cap for the financial year. The concessional contributions cap for the 2010-11 financial year is $50,000.00. Therefore, your non-concessional contributions cap for the 2010-11 financial year is $150,000.00.

To accommodate larger contributions, 'bring forward' provisions for non-concessional contributions apply to individuals aged under 65 in a financial year. Under the bring forward provisions the future two year's contributions caps can be brought forward. This means that a person under age 65 can make non-concessional contributions up to three times the non-concessional contributions cap at once, or at any time during the three consecutive financial year period without exceeding their non-concessional contributions cap. Therefore, your non-concessional contributions cap, allowing for the bring forward provisions, is $450,000.00.

You have advised that you wish to make a substantial non-concessional contribution in the 2010-11 financial year. Based on the amount of the non-concessional contributions cap this contribution would result in you exceeding your non-concessional contributions cap and incurring an excess contributions tax liability.

Consequently, a request for the Commissioner to exercise his discretion was lodged, to disregard the amount of your potential excess non-concessional contribution for the 2010-11 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 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 made gradually over a person's lifetime.

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

· an amount of your non-concessional contribution made in the 2010-11 financial year would be more appropriately allocated to a different financial year; and

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

Your circumstances

You have contended that you sustained an injury that rendered you disabled. You issued Court proceedings against the relevant party for loss and damage suffered as a result of the accident.

A compromise was entered into between you and the relevant party, and orders were made that you be paid a sum as settlement for your personal injuries.

You did not consider seeking advice regarding the management of your financial affairs at this time both due to your medical and physical condition and as you were also significantly inexperienced with financial matters.

Your disability and the court proceedings have come at great personal cost to both you and your family, Your care requires ongoing assistance regarding your day to day activities.

Since the accident you have been undergoing ongoing medical treatment and will require this treatment for the remainder of your life. This treatment is very costly and your quality of life is very poor. Extensive modifications and renovations were made to the home you own to accommodate your specialised requirements to live at home. Currently, your expenses, including general living expenses, ongoing expenses and major future costs, do not leave any surplus income.

You intend to establish a new SMSF, to make a concessional contribution each financial year and if permitted a substantial non-concessional contribution. If this contribution is not permitted, you will consider making non-concessional contributions up to the standard limits. Recent advice received from your financial adviser has recommended that a SMSF structure is advantageous as it allows for greater investment control and greater protection of your assets.

If you are permitted to make a substantial non-concessional contribution to superannuation you will consider accessing a disability superannuation benefit by way of a pension. You meet the definition of permanent incapacity therefore you satisfy a condition of release to access your superannuation benefits.

It is contended that there is something unusual to take your case outside the ordinary course. You are inexperienced with the management of financial affairs and have been unaware of the need to obtain advice to structure your future financial arrangements. You are wholly dependent on the advice provided by your financial advisers, as distinguished from Mr and Mrs McMennimen in McMennimen and Commissioner of Taxation [2010] AATA 573 (3 August 2010). Mr McMennimen was a retired accountant and it is expected that he would have known that laws would change and that the legislation regulates the circumstances in which the tax is determined.

It is also contended that your circumstances, in light of the purpose of the excess contributions tax, make it unjust, unreasonable or inappropriate to impose the liability for excess contributions tax. You are not expected to enter the workforce as a result of your limited qualifications and training. It was intended that the settlement payout would compensate you for personal injuries and cover your substantially increased future living costs. If you exceed your non-concessional contributions cap and are taxed with excess contributions tax, this would result in your superannuation benefits being severely impacted and reduce the amount available for your day to day living expenses as well as future expenses and contingencies. Given you have to survive on the limited funding available to you for the remainder of your life; you seek to maximise the prospects of this money to be invested in the most appropriate vehicle. Naturally, you are seeking to be self funded and to limit any potential reliance on the social security system.

The effect of reallocating or disregarding was highlighted and whether this is at odds with the purpose of Division 292 of the ITAA 1997. You will not receive employer contributions over the course of your life and any contributions made now would be in substitution of contributions that would have been made on your behalf had you been gainfully employed.

You have also highlighted the extent to which you had control over the situation. While you can control your future contributions, which will be made on the advice of your financial advisers, you did not have control over your ability to make contributions prior to 10 May 2006 as you did not have the knowledge, expertise or advice. At the time of receiving the compensation payment you did not take advantage of the ability to make a contribution to a superannuation fund relating to orders made for personal injuries under section 295-95 of the ITAA 1997.

Application of the law to your case

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 to ATO staff on how to exercise the Commissioner's discretion to reallocate or disregard concessional or non-concessional contributions for a financial year.

Paragraph 21 of PS LA 2008/1 explains that 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.

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.

Several contentions of particular relevance have been made regarding the existence of special circumstances. These contentions have been addressed individually below.

There is something unusual to take your case outside the ordinary course

In making this contention, you have highlighted that, due to your circumstances, you were financially inexperienced and unaware of the need to structure your future financial arrangements and have drawn attention to the case of McMennemin & Anor v FC of T [2010] AATA 573.

It is acknowledged that your circumstances as described in your application would be considered unusual or outside the ordinary for an individual however this doesn't mean they are considered unusual or uncommon according to the law. Your medical and physical condition and the treatment of these conditions do not of themselves establish special circumstances. You would need to establish that your condition impaired your judgment at the time of making the contribution, rather than being the reason for the contribution.

Although the circumstances relating to how you obtained the monies intended to be used for the contribution were unusual, it does not follow that an unusual, uncommon or out of the ordinary circumstance prevents you from understanding the law now. It isn't unjust, unfair or otherwise inappropriate for an individual to pay excess contributions tax on excess contributions they choose to make to their superannuation simply because the funds they contributed arose from an event which was unusual.

It is further acknowledged that your circumstances would have affected your financial experience and your awareness to structure your finances, however a claim that an individual was unaware of the law as it currently stands would generally not be regarded as special circumstances unless other factors existed which would make the unawareness reasonable or understandable in the circumstances. An example of such a factor would be where it can be established that incorrect advice was provided to an individual by the ATO which resulted in a misconception as to the operation of the legislation.

Furthermore, information was publicly available from both the ATO and Treasury regarding the proposed changes to superannuation and specifying both what contributions constitute non-concessional contributions and the non-concessional contributions caps applied to contributions made to a superannuation fund.

Your contention regarding McMennemin & Anor v FC of T [2010] AATA 573 has been considered however unlike your proposed contribution, Mr and Mrs McMennemin had already made their contributions to superannuation and had been assessed for excess contributions tax. The basis of their argument for the excess contributions to be disregarded or reallocated was that, based on the available information, it was not reasonably foreseeable that they would exceed the non-concessional contributions cap. This contrasts with your situation where no contribution has been made to superannuation. Therefore, it is considered that there is sufficient information available at this time to enable you to make reasonably informed decisions regarding your contributions to superannuation.

Additionally, it should be noted that the Administrative Appeals Tribunal concluded that it did not have the jurisdiction to review the Commissioner's refusal to make a determination under section 292-465 of the ITAA 1997. Any reasoning provided as to the validity of the Commissioner's decision to impose excess contributions tax was provided in the context of this conclusion being later found to be incorrect.

Consequently, while it is acknowledged that your circumstances as described in your application would be considered unusual or outside the ordinary for an individual, they are not considered to constitute special circumstances in terms of your proposed non-concessional contribution to superannuation.

In light of the purpose of the excess contributions tax, the circumstances make it unjust, unreasonable or inappropriate to impose the liability for excess contributions tax

In making this contention, you have highlighted that your settlement payout was intended to both compensate you for your injury and cover your costs of living therefore any liability to excess contributions tax would severely impact this intention. Your current funding is all that will be available to you for the remainder of your life therefore you seek to maximise this by investing in superannuation and have drawn attention to your intention to be self funded and limit any potential reliance on the social security system.

It is acknowledged that in making this contribution your intention is to fund your costs of living and that the imposition of excess contributions tax would reduce any amounts contributed to superannuation however, as stated previously, it isn't unjust, unfair or otherwise inappropriate for an individual to pay excess contributions tax on excess contributions they choose to make to their superannuation.

It should be noted that the legislative intent of excess contributions tax is to tax contributions for an individual that exceed a relevant contributions cap in a financial year. This intent is reinforced by sections 292-1 and 292-5 of the ITAA 1997 which are important indicators of the intended purpose of the excess contributions tax system.

Section 292-1 of the ITAA 1997 provides the guide to Division 292. Section 292-1 of the ITAA 1997 states:

This Division limits the superannuation contributions made in a financial year for a person that receives concessionally taxed treatment.

Section 292-5 of the ITAA 1997 provides the object of Division 292. Section 292-5 of the ITAA 1997 states:

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

Consequently, it is acknowledged that your intention is to fund your costs of living and limit any reliance on the social security system however, given that the intrinsic purpose of excess contributions tax is to tax contributions that exceed a relevant contributions cap in a financial year, it is not considered that the imposition of excess contributions tax would be unjust, unreasonable or inappropriate in terms of your proposed non-concessional contribution to superannuation.

The effect of reallocating or disregarding and whether this is at odds with the purpose of Division 292 of the ITAA 1997.

In making this contention, you have highlighted that you will not receive employer contributions in the future and any contributions made now would be in substitution of contributions that would have been made had you been gainfully employed.

It is acknowledged that, given your circumstances, you may be unable to undertake gainful employment in the future and that this will effect your entitlement to future employer contributions however, as stated previously, the object of Division 292 of the ITAA 1997 is to ensure that the amount of concessionally taxed superannuation benefits an individual receives results from contributions that have been made gradually over the course of the individual's life. To achieve its object Division 292 of the ITAA 1997 limits the amount of contributions made to a superannuation provider which are concessionally taxed each financial year.

Consequently, it is acknowledged that any contributions made now may be in substitution of contributions received had you been gainfully employed in the future however, given that the purpose of Division 292 of the ITAA 1997 is to limit the superannuation contributions made in a financial year for an individual that receive concessionally taxed treatment, it is not considered that this constitutes special circumstances in terms of your proposed non-concessional contribution to superannuation.

The extent to which you had control over the situation

In making this contention, you have highlighted your inability to make contributions to superannuation both at the time of receiving your compensation payment and prior to 10 May 2006 as you did not have the knowledge, expertise or advice.

It is acknowledged that, given your circumstances, you may not have understood the rules governing contributing to superannuation however, as stated previously, a claim that an individual was unaware of the law as it currently stands would generally not be regarded as special circumstances unless other factors existed which would make the unawareness reasonable or understandable in the circumstances. As stated previously, an example of such a factor would be where it can be established that incorrect advice was provided to an individual by the ATO which resulted in a misconception as to the operation of the legislation.

In addition, as stated previously, information was publicly available from both the ATO and Treasury regarding the proposed changes to superannuation and specifying both what contributions constitute non-concessional contributions and the non-concessional contributions caps applied to contributions made to a superannuation fund.

More specifically, information was available regarding contributions arising from certain orders for personal injuries that result in permanent incapacity. The available information detailed the transitional arrangements applied to these contributions which specifically affected the time limits set out for both the making of such contributions and the requirement to notify the superannuation fund of your intention to make such a contribution.

As a result it is considered that sufficient information was available to enable you to have made reasonably informed decisions regarding your contributions to superannuation.

It should be noted that 'control' can be a relevant factor for consideration in determining whether to exercise the discretion to disregard an amount of excess contributions. However, in this context control refers to the extent to which an individual had control over the making of a contribution. In your case, as the proposed contribution is a non-concessional contribution it is readily established that you have control over both the amount and timing of the contribution.

Consequently, it is acknowledged that you may not have possessed the knowledge, expertise or advice to maximise the value of your contributions to superannuation prior to 10 May 2006, however it is not considered that this constitutes special circumstances in terms of your proposed non-concessional contribution to superannuation.

Paragraphs 32 to 34 of PS LA 2008/1 explain the factors that may be considered in making a determination exercising the discretion under section 292-465 of the ITAA 1997. When making a decision to issue a determination, the Commissioner may have regard to whether the contributions would be more appropriately allocated to another financial year, whether it was reasonably foreseeable when a relevant contribution was made that this would result in exceeding a contributions cap and any other relevant matters.

In terms of whether a contribution would be more appropriately allocated to another financial year, a contribution will usually only be considered more appropriately allocated to another financial year if it was required to have been made in a different financial year. A contribution won't be considered to be more appropriately allocated to another financial year simply because it was intended to be made, or the liability to make the contribution accrued, in a different financial year.

In this case, you have not contended, and no evidence has been provided to substantiate, that the contribution would be more appropriately allocated to another financial year. However, the following information is provided in regard to the concept of 'more appropriately allocated.'

Taxation Ruling TR 2010/1 Income tax: Superannuation Contributions (TR 2010/1) explains the Commissioner's view as to when a contribution is considered to be made. Paragraph 12 of TR 2010/1 states, as a general rule, that the contribution will be made when the funds are received by the superannuation provider.

Based on this ruling, any contribution made to a superannuation fund in the 2010-11 financial year will be required to be reported by the superannuation fund as a contribution received in respect of the 2010-11 financial year. Therefore, the contribution would not ordinarily be considered to be more appropriately referrable to another financial year.

In terms of whether it was reasonably foreseeable when a relevant contribution was made that this would result in exceeding a contributions cap, what is reasonably foreseeable has to be determined objectively on a case-by-case basis. It doesn't involve what an individual actually foresaw at the time a contribution is made but instead requires considering what an individual reasonably could foresee in their circumstances.

Information is publicly available from the ATO regarding excess contributions tax and specifying the non-concessional contributions caps applied to contributions made to a superannuation fund in the 2010-11 financial year.

Based on your level of control, and the information publicly available to enable reasonably informed decisions to be made regarding contributions to superannuation funds, it would be reasonably foreseeable, based on the amount and timing of the contribution you propose to make in the 2010-11 financial year, that you would exceed the non-concessional contributions cap for that financial year.

Conclusion

In summary, it is acknowledged that that your circumstances as described in your application would be considered unusual or outside the ordinary for an individual. However, they are not considered to constitute special circumstances in terms of your proposed non-concessional contribution to superannuation while the imposition of excess contributions tax on the proposed contribution is considered to be consistent with the object of Division 292 of the ITAA 1997.

Furthermore, the contribution would not ordinarily be considered to be more appropriately referrable to another financial year and it is considered reasonably foreseeable that the proposed contribution would be counted against your non-concessional contributions cap for the 2010-11 financial year, resulting in you exceeding your non-concessional contributions cap for that financial year.

Consequently, it is considered that, based on the facts of your case, special circumstances do not exist to disregard the amount of your proposed non-concessional contribution for the 2010-11 financial year for the purposes of excess contributions tax.

However, if you choose to make the non-concessional contribution, once you are issued with an excess contributions tax assessment or after all of the contributions sought to be disregarded or reallocated have been made, and if you still believe that your situation does warrant the Commissioner issuing a determination to disregard or reallocate contributions you may apply for the Commissioner to exercise such discretion at that time.

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.