Can SMSF return your contributions? Yes, but only some. Our technical director will be presenting at the traders expo save $10 per ticket

Can a SMSF return contributions which are in excess of contribution Caps? Yes, but only some.

What is Excess Contribution Tax?

We live in a country where the government penalizes you to save for tomorrow. There is no cap on how much an employer can pay into super for an employee and claim a tax deduction, but when the super fund receives more than a certain amount (called a "concessional cap"), the fund pays 31.5% in addition to the tax on contribution of 15%.

A total of 46.5% (Sec 292-25(2) (3) of ITAA 97) is paid on the excess over the cap amount and any excess concessional contributions are also included toward the individual non-concessional contribution cap (Sec 292-20(1)(b) - explained below). Please note that this rate of tax is only paid by individuals who earn more than $180,000.

Concessional Contributions

In 2009 /10 tax year, concessional cap is $25,000 and for people over 50 years up to 30th June 2012 are able to make double this contributions cap per annum. So, if you are turning 50 before 30th June 2010 all contributions during the year 2009 / 10 up to $50,000, will be below the cap amount.

The penalty tax (31.5% additional tax) sounds a bit unfair, as some employer contributions (could, by mistake), take the employees total super contributions go over the cap limit and nothing can be done about it once the fund receives the money - as super funds are not allowed to return contributions to the employer.

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Non - concessional Contributions

There is another type of contributions which are called non-concessional contributions (Section 292-20(2) of ITAA 97) - these contributions are made from monies from after tax - no one claims a tax deduction for these contributions and the super fund does not pay any tax when it receives it. The cap for 2009 / 10 year is $150,000 and taxpayers under the age of 65 can bring forward two future years of their non-concessional contribution limit and make a large one-off contribution (Sec 292-85 (3) (4) of ITAA 97). Again, if you contribute more than the cap amount, you have to pay 46.5% tax or get the trustee of the super fund to pay this tax for you.

The good thing about the excessive non-concessional contributions is that they can be refunded back to the member.

Legislation

Regulation 7.04 (3) of SISR - a regulated superannuation fund must not accept any fund-capped contributions in a financial year in respect of a member that exceed:
(a) If the member is 64 or less on 1 July ..... six times the amount of non-concessional contribution cap; or
(b) if the member is 65 but less than 75... the non-concessional contribution cap.

Reg 7.04 (4) - if a regulated superannuation fund receives an amount that is inconsistent with sub regulation ... (3)
(a) the fund must return the amount to the entity or person that paid the amount within 30 days of becoming aware that the amount was received in a manner that is inconsistent with ... (3)

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However, the onus is on the individual to ensure that their non-concessional contributions do not exceed their relevant caps and the ATO has clarified the operation of SISR via ATO ID 2007/225 and ATO ID 2208/90.

Can Contributions be returned?

ATO ID 2007/225 talks about if trustee is required to consider any other non-concessional contribution made to the fund earlier in the year or previous years or to any other fund when determining whether a member has made contributions in excess of their cap.

This ID states that the Reg 7.04 does not stipulate that trustee must total previous contributions made to the fund or any other contributions made to other funds. Hence Reg 7.04 (4) will apply contribution-by- contribution basis and not a year basis or any other basis. Which means that trustee needs to consider each contribution in isolation in deciding if they can be returned.

Only a single contribution by itself that is excessive can be returned, or in other words, if a member makes non-concessional contributions over the year that in total are excessive but no one single contribution by itself is excessive cannot be returned. (e. g a member under 65 year old makes four quarterly contributions in one year of $450K, $300K, $600K & $150K: only $600K can be returned and the member will pay excess contribution tax on $150K and $300K contributions)

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Real Life Example

John is a Jeweller (sole trader) and is a single member of SMSF with a corporate trustee. He turned 63 during the year 2009 /10 and sells his Mosman home and moves to a Unit in Crows Nest and is left with $500K in early May 2010. In June 2010 he cannot work out his profit for the year, however does not want to miss the opportunity of a tax deduction of super contribution and pay only 15% contribution tax instead of 31.5% or higher rate at individual tax rate.

Let us discuss the three below situations, if on 5th July 2010, his accountant informs him that his business in fact made a loss of $40,000 after considering the $50,000 contributions made during the year 2009 /10.

(i)                 He contributes $450K on 15th May 2010 and $50K on 15th June 2010
(ii)               He contributes $500K on 15th May 2010
(iii)             He contributes $500K on 15th June 2010

In (i) nothing can be done to avoid tax on concessional contribution of 15% on the contribution made on 15th June 2010. Contribution on 15th May 2010 of $450K and on 15th June 2010 of $50K cannot be both treated as non-concessional contributions and returned by the trustee as no one contribution is in excess of the contribution cap.

If John treats both the contributions as non-concessional he will have to pay 46.5% tax as excess non-concessional contribution tax on $50,000. John is better off to pay 15% tax on contributions of $50,000 on 15th June 2010 and treat the contribution as concessional and carry forward his trading loss.

In (ii) and (iii) above the only difference is the date of the contribution. In these cases, John is better off to classify the full amount of $500K contribution as non-concessional, instead of partly considering $50K as concessional contribution.

Regulation 7.04 (4) (a) clearly states that : the fund must return the amount to the entity or person that paid the amount within 30 days of becoming aware that the amount was received is over the cap limit. Since the trustee (corporate trustee where John is the only director) become aware only on 5th July 2010 (Note: there is no time limit of becoming aware) that the contribution is excessive of the non-concessional cap, the trustee must return the excessive amount to John before 3rd August 2010.

At individual level, the accountant will treat $50,000 as receivables and not as super expense and show a trading profit of $10,000, John will not pay any tax due to low income rebate. At SMSF level the accountant will show $50K as a liability in the financial statements and declare $450K as non-concessional contribution of the total $500K contribution. If common sense prevails the contributions will be converted to pension phase, since John is over 60.

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Note the "30 day" relevance is to the day limit, within which the excessive component has to be returned by the trustee after being aware that the contribution is excessive to the non-concessional cap to the person who contributed and is not the "30 day" limit from the contribution date by which the contributions are to be returned. However, in our example, it can be argued by ATO that "awareness" should be present on the date of contribution, more so, as John is the only member and is also the sole director of the corporate trustee, hence using this example in a real life situation can be dangerous.

ATO ID 2008/90 talks about the amount to be returned - it is just the excessive amount which is required to be returned ($50,000 and not the whole $500,000 in our example) and not the whole amount.

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This article is written by our Technical Director - If you have purchased a SMSF trust deed from us - he can answer your queries for free.

Manoj Abichandani SMSF Specialist Advisor

SMSF Specialist Advisor

SMSF Speialist Auditor

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