Excess Contributions Tax and Your SMSF

Over contributing to your SMSF can cause excess taxation of your fund, one of the issues that Excess Contributions Tax (ECT) has highlighted is fund reporting of information.

In May 2009 the ATO wrote to approximately 30,000 taxpayers who may have made excess contributions in the 2007/2008 financial year.

Interestingly they discovered from this that some super funds had poor contributions reporting practices, particularly reporting personal contributions which the member notified the fund they intended to claim as an income tax deduction as employer contributions (and sometimes the taxpayer not reporting the income tax deduction at the correct label).

There is now an increasing concern that some of the fund information that is being re-reported is not correct. The ATO is receiving amended information several years after the event and with significantly different information from what was originally reported.

While all cases are normally considered individually, they are placing significant weight on information reported to them before the taxpayer was aware of the consequences of this reporting, and which the member, who was also a trustee of the fund, did not identify for a significant period of time was incorrect.

So bear in mind that making excess contributions is not illegal and it’s not a breach of super laws – it’s not something the taxpayer can or should attempt to ‘rectify’. The law imposes a tax on the amount of a taxpayer’s excess contributions and the ATO takes this very seriously if you as a taxpayer try to avoid tax.

If a contribution is made because of a mistake in making the contribution – and not the consequence of making it – the fund may be required to restore the amount to the contributor.

However, if at the time of the payment the contributor intended to obtain superannuation benefits for the member for the amount of the payment there is no relevant mistake.

So, what can you do if you have made excess contributions to your SMSF?

As you may know, excess contributions tax (ECT) is a tax and not a penalty so the ATO cannot remit it. While the Commissioner has a discretion by which he can disregard or reallocate contributions – only for the purposes of ECT – this power is limited to where the Commissioner considers there were special circumstances.

So be warned, do your checks, keep good records and work with your accountant or a good advise closely to ensure you don’t get hit with excess contributions tax in your SMSF. Make sure you are not exceeding the contributions caps, keep the ATO happy and reduce the risk of an external Audit. (to be updated)