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Ruling

Subject: Assessable contribution of a self managed superannuation fund

Questions

1. Are the personal contributions of $X made by the Fund Member in the 2007-08 income year included in the assessable income of the self managed superannuation fund (SMSF)?

2. Is the Fund Member of the SMSF entitled to claim a deduction for personal contributions under section 292-170 of the Income Tax Assessment Act 1997 (ITAA 1997)?

3. Can a variation be made under section 290-180 of the ITAA 1997 where the superannuation provider has commenced paying an income stream based in whole, or in part, on the personal contributions?

4. Is the compensation payment made by a financial institution and deposited into the SMSF a superannuation contribution and included in the assessable income of the SMSF?

Answers

1. No.

2. No.

3. No

4. Yes

This ruling applies for the following period:

Year ended 30 June 2008

The scheme commences on:

1 July 2007

Relevant facts and circumstances

1. The Fund Member is both a trustee and sole member of which is a self managed superannuation fund (the Fund).

2. In the second quarter of the 2007-08 income year, upon the advice from a financial planner, the Fund Member made a personal contribution to the Fund with the intention of claiming a lesser amount as a tax deduction and the remainder as a non-concessional contribution.

3. The Fund Member informed the trustees of the Fund that they intended to claim $X as a tax deduction for personal superannuation contributions in the 2007-08 income year. However, no formal notice of intent was lodged with the trustees of the Fund.

4. The trustees of the Fund included the $X as assessable income in the Fund's 2007-08 income tax return and paid tax for this personal contribution.

5. The Fund Member commenced a superannuation income stream on the same day that the contribution was made.

6. The Fund Member did not have sufficient assessable income in the 2007-08 income tax year to claim the whole $X as a deduction for personal superannuation contributions. The amount that was able to be claimed was only $Y.

7. Consequently, the Fund Member claimed $Y as a deduction for personal superannuation contributions in the Fund Member's 2007-08 income tax return. The Notice of Assessment for the 2007-08 income year issued in the last quarter of the 2008-09 income year.

8. Less than a month later, the Australian Tax Office (ATO) issued a letter to the Fund Member indicating that the Fund member may have to pay excess contributions tax for the 2007-08 income year.

9. Towards the end of the first quarter of the 2010-11 income year, the Fund Member was issued with an excess contributions tax assessment for an amount being 46.5% of the excess non-concessional contribution.

10. The Fund Member advised the trustees of the Fund of the Fund Member's inability to claim a full deduction for the concessional contributions and requested that the Fund's income tax return be adjusted to only include the amount actually claimed as tax deduction by the Fund Member as assessable contributions.

11. At the end of the third quarter of the 2010-11 income year, a self amendment request was lodged by the Fund Member's representative (you) to the ATO in respect of the 2007-08 income tax return. The basis of the self amendment request was to reduce the concessional contributions from the amount originally declared in the Fund's income tax return to the amount that your client was able to claim as a tax deduction in their income tax return.

12. At the time the self amendment request was lodged, it was stated in the facts that the Fund Member had not lodged a notice of intention to vary the amount claimed as a tax deduction in the Fund Member's 2007-08 income tax return.

13. The reason the Fund Member delayed advising the trustees of the Fund to vary the amount was that there was a request in progress to disregard or re-allocate the excess contributions. This request has now concluded and the original excess contributions tax assessment has been confirmed and the excess contributions tax has been paid.

14. As a result of the request and information provided by you, the Fund's income tax return was amended under the self assessment system. The amended assessment was issued at the end of the 2010-11 income year.

15. Whilst the self amendment request was being processed, the Fund Member made a complaint to the financial institution represented by the financial planner who provided the original advice to contribute the total amount of the contributions to the Fund.

16. Towards the end of the 2010-11 income year, the financial institution accepted the Fund Member's claim and reimbursed the Fund Member for the excess contributions tax levied. In addition, the financial institution also reimbursed the Fund for the contributions tax that was paid by the Fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 290-170.

Income Tax Assessment Act 1997 Subsection 290-170(1).

Income Tax Assessment Act 1997 Section 290-180.

Income Tax Assessment Act 1997 Subsection 290-180(1).

Income Tax Assessment Act 1997 Subsection 290-180(3A).

Income Tax Assessment Act 1997 Paragraph 290-180(3A)(c).

Reasons for decision

Summary

The Fund Member did not lodge a notice of intent to claim a deduction for personal contributions with the trustees of the Fund, as required under the legislation. Therefore; the Fund Member is not entitled to claim a deduction in the Fund Member's individual income tax return for the 2007-08 income year.

As no notice of intent was lodged by the Fund Member with the trustees of the Fund, the issue in relation to varying such a notice is not relevant.

The compensation amount deposited by the financial institution to the Fund Member's account in the SMSF is clearly for the benefit of the Fund Member and results in an increase in the capital of the SMSF. Therefore, the amount is a contribution to the superannuation fund.

Detailed reasoning

Personal superannuation contributions made in the 2007-08 income year

Where all the conditions in subdivision 290-C of the ITAA 1997 are satisfied, a person can claim a deduction for personal contributions they make to a superannuation fund.

These conditions are explained in detail in Taxation Ruling TR 2010/1 entitled 'Income Tax: superannuation contributions'.

One of these conditions, section 290-170 of the ITAA 1997, is that the member making the contribution must provide a valid notice of intent to claim a deduction (the notice) to the superannuation fund receiving the contribution. The notice must be in the approved form and must have been given to the fund trustee by the required time. The member must also have been given an acknowledgment of receipt of the notice by the fund trustee.

Further to the above it should be noted that as a consequence of a valid notice being lodged and acknowledged under section 290-170 of the ITAA 1997, a contribution covered by a valid notice represents assessable income of the superannuation fund under Item 1 of the table in subsection 295-190(1). This in effect means that the tax paid on the contribution covered by the notice represents a tax liability to be paid by the superannuation fund.

In this case the Fund Member did not lodge a notice of intent with the trustees of the Fund for the 2007-08 income year. Therefore the Fund Member has not satisfied the notice of intent to claim a deduction requirement in section 290-170 of the ITAA 1997.

Accordingly, the Fund Member is not entitled to claim a deduction for any personal contributions in their 2007-08 income tax return.

Variation of a notice of intent to deduct conditions

In accordance with subsection 290-180(1) of the ITAA 1997 a person cannot revoke or withdraw a valid notice of intent in relation to a personal contribution. However, a valid notice can be varied under section 290-180 subject to a number of restrictions.

However, in the present case the Fund Member never lodged a valid notice with the trustees of the Fund. Therefore consideration for variation of a valid notice is not applicable.

It should be noted that even if a valid notice were to have been lodged by the Fund Member, paragraph 290-180(3A)(c) of the ITAA 1997 provides that a person cannot vary a valid notice where the fund trustee has commenced to pay an income stream based in whole or part on the contribution. In the present case, on the same day that the personal superannuation contribution was made; the trustees of the Fund had begun to pay a superannuation income stream to the Fund Member. Therefore, the notice cannot be varied.

Self-assessment

The Australian tax system works by self-assessment. Under the self-assessment system of taxation, tax returns are not subject to technical or other scrutiny before assessment. In making an assessment, the Commissioner is authorised to accept, without examination, statements made by, or on behalf of, the taxpayer in the return or in any other relevant document. In other words, any mistakes made by the taxpayer, unless they render the return incomplete or substandard, will remain undetected. It is the responsibility of the taxpayer to ensure that all the information they enter is true and correct.

Following on from the original self-assessment provisions, self-amendment provisions were introduced to allow taxpayers to request amendments to their tax returns. The concepts of self-amendment follow on from those of self-assessment, whereby if a taxpayer requests an amendment to their return, the Commissioner may accept the request and amend the return without having to first check the taxpayer's claims.

In this case, you had lodged an amendment request on behalf of the trustee of the Fund at the end of the third quarter of the 2010-11 income year to amend the Fund's income tax return for the 2007-08 income year by reducing the contribution from the amount originally declared to amount that your client was able to claim as a tax deduction in their income tax return. The Commissioner accepted the request as a self-amendment request. Consequently, the return was amended at face value and the taxpayer's claims were not questioned. This resulted in the amended assessment that issued at the end of the 2010-11 income year.

As noted in the facts, the Fund Member did not lodge a notice of intent, as required under subsection 290-170(1) of the ITAA 1997, to the trustees of the Fund. Therefore, the trustees of the Fund should not have included the personal contributions as assessable income for the relevant year. However, for reasons not disclosed, the trustees of the Fund included the amount up to the statutory limit as concessional contributions and, hence, assessable income of the Fund for the relevant year.

Subsequently, as a result of the self-amendment request, the amount originally included as concessional contributions was reduced to reflect the amount claimed by the Fund Member as a deduction in their income tax return for the 2007-08 income year.

Under normal circumstances, if a valid notice under subsection 290-170(1) of the ITAA 1997 had been lodged with, and acknowledged by, the trustees of the Fund, the Fund would have been precluded from amending the Fund return to reflect the amount actually claimed as a deduction by the Fund Member in their income tax return. The operative provision that would have prevented that amendment is subsection 290-180(3A) which states:

The variation is not effective if, when you make it:

(a) you were not a member of the fund or the holder of the *RSA; or

(b) the trustee or *RSA provider no longer holds the contribution; or

(c) the trustee or RSA provider has begun to pay a *superannuation income stream based in whole or part on the contribution. (bold emphasis added)

However, as already noted, a valid notice under subsection 290-170(1) of the ITAA 1997 had not been lodged with, and acknowledged by, the trustees of the Fund.

Consequently, the assessable income of the Fund for the 2007-08 income year needs to be further reduced to exclude the amount incorrectly included as concessional contributions.

Compensation amount deposited to your client's fund account

As noted in the facts, the Fund Member made a complaint to the financial institution represented by the financial planner who provided the original advice to contribute the total amount to the Fund. As a result, towards the end of the 2010-11 income year, the financial institution directly reimbursed the Fund Member for an amount representing the excess contributions tax liability imposed by the excess contributions tax assessment that issued towards the end of the first quarter of the 2010-11 income year.

In addition, at the same time, the financial institution directly reimbursed the Fund for the contributions tax that was paid by the Fund. The issue to be examined is whether or not this undisclosed amount represents a contribution to the Fund in the 2011-12 income year.

Taxation Ruling 2010/1 entitled 'Income tax: superannuation contributions' sets out the Commissioner's view on what would constitute 'contributions' to a superannuation fund, In paragraphs 4 and 6 to 8 the Commissioner states:

4. In the superannuation context, a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.

…

6. Not every increase in the capital of a fund is a superannuation contribution as a person who increases a fund's capital must have the purpose of benefiting one or more particular members of the fund or all of the members in general.

7. A person's purpose is the object which they have in view or in mind. Generally, a person will be said to intend the natural and probable consequences of their acts and likewise their purpose may be inferred from their acts. This is a determination of a person's objective purpose, not their subjective intention.

8. A person will not normally have a purpose of benefiting a member of the fund if the transaction they carry out is in no way dependent upon the identity of the other party as a superannuation provider or they are simply fulfilling the terms of a contract or arrangement entered into on a commercial or arm's length basis.

An objective determination of a person's purpose may in some cases lead to the conclusion that the person's purpose is to benefit one or more particular members of the fund or all of the members in general. This may occur when a transaction or arrangement:

· is entered into because of a connection or relationship between the person and the superannuation provider or

· cannot be explained by reference to commercial or arm's length dealings.

The Commissioner's views about determining a person's objective in relation to possible superannuation contributions are explained at paragraphs 128 to 149 of TR 2010/1. What is required is a determination of objective purpose as distinct from a person's subjective intention. In general terms, the Commissioner considers that the matter of whether an amount is a superannuation contribution is determined by having regard to whether a superannuation provider is given something of value and whether what is given is given for a particular purpose.

From the above it is clear that the Commissioner considers that a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.

In this case, acting on the advice of a financial planner, the Fund Member contributed the total amount to the Fund. As a result of the advice and prior to the amendment of the Fund's income tax return at the end of the 2010-11 income year, the Fund Member ended up personally paying excess contributions tax. In addition, tax was paid by the Fund on part of the contribution that was included in the Fund's income for the 2007-08 income year.

The Fund Member made a complaint to the financial institution represented by the financial planner. The financial institution accepted the Fund Member's claim and reimbursed the Fund Member for the excess contributions tax liability. In addition, the Fund was reimbursed for the tax paid by the Fund on the personal contributions included as concessional contributions.

It is clear from the above; the Fund Member was compensated for the failure of the financial planner, an employee of the financial institution, to properly fulfil their obligations to the Fund Member as a client. This is supported by the fact that the financial institution agreed to directly reimburse the Fund Member for the excess contribution tax and directly reimburse the Fund for the tax paid by the Fund on the personal contributions included as concessional contributions.

The compensation payment made to the Fund trustees was deposited into the member's fund account. Accordingly, the making of those payments satisfies the objective test that the payments are to benefit of the member as a member of the Fund. Furthermore, the settlement monies are received in respect of the Fund Member's right to be compensated for the incorrect advice provided by the financial planner.

The deposit of the compensation amount will increase the capital of the Fund and the amount can be objectively viewed as being deposited by the Fund Member for the purpose of benefitting of them as a member of the Fund. Therefore, the amount is a contribution to the Fund.