Following a review into the administration of the excess contributions tax (ECT) regime, the Inspector-General of Taxation (IGT) has recommended a total of 11 changes be made to the existing system.
Of the 11 recommendations, two were directed at the government, while the Australian Taxation Office (ATO) has agreed in full, in part, or in principle with eight of them.
The one recommendation the ATO rejected was a call to clarify the operation of the de minimis process, under which no ECT assessment is issued if breaches of the contributions caps are deemed small or insignificant.
In particular, the IGT suggested the threshold applied to the de minimis process be divulged to taxpayers.
Specifically, the IGT wanted the ATO to “publish further information on its ECT de minimis approach, including how the ATO identifies and treats such cases and what taxpayers can do if they consider that their case qualifies for ‘de minimis’ consideration but have nonetheless received an ECT assessment”.
It also recommended the ATO “inform taxpayers when the de minimis approach has been taken in relation to their excess contributions”.
The ATO rejected those recommendations, citing two main reasons. In response to both suggestions, the ATO said it “does not agree with this recommendation as it may lead to the de minimis threshold being known or reasonably estimated and may give rise to individuals unfairly obtaining a benefit by making excess contributions up to the threshold on an ongoing basis”.
In regard to the second recommendation, the tax office said it was in disagreement due to the additional administration costs it might potentially lead to.
“Part of the basis for a de minimis approach is to minimise costs of compliance for taxpayers and their advisers as well as ATO administration costs. Informing taxpayers when they are under the de minimis would increase administration and compliance costs,” the regulator said.
The ATO did agree to publish general information on its website about its de minimis approach, but was of the view “taxpayers already have appropriate avenues to seek review of their particular circumstances if they have concerns”.
Another significant recommendation the IGT made was in reference to contributions limiting or rejection clauses contained in an SMSF trust deed.
“The IGT recommends that the ATO seek an appropriate test case vehicle to obtain a judicial declaration on the effectiveness of contributions limiting clauses to cap the amount of contributions made to superannuation funds,” it said.
Having had this issue raised initially in 2010, with a subsequent number of pieces of correspondence and measures to deal with it, there currently is still no definitive direction as to the legality of these clauses. The ATO agreed with the IGT’s recommendation.
A further significant suggested change was made in regard to the ATO’s use of its discretionary powers not to apply the ECT rules where the contributions cap breach had special circumstances associated with it.
“The IGT recommends that the ATO update its public guidance on genuine mistakes leading to excess contributions to reflect those circumstances in which mistakes may be effectively corrected and those in which it may not,” the report said.
The ATO agreed with this recommendation.
