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Navigating excess contributions beyond budget

As the 2016 budget proposal for non-concessional contributions caps takes another twist, SMSF practitioners could be forgiven for thinking: “How long before the rules change yet again?”

The government has backflipped on its original announcement of the $500,000-lifetime non-concessional contribution cap and replaced it with an annual cap of $100,000 starting 1 July 2017.

Members under the age of 65 and with a balance of less than $1.6 million can still trigger the three-year-bring forward provision and contribute $300,000. But once they hit a $1.6 million super balance, they will no longer be eligible to make non-concessional contributions.

Additionally, the work test has been reinstated, meaning members between the ages of 65 to 74 will still need to work a minimum of 40 hours over 30 consecutive days to contribute.

When there’s also a focus on getting the best return in a low-interest-rate economy, it can be easy to forget the rules about how a fund accepts contributions in the first place.

Documenting contributions critical

Best practice is to ensure all contributions and rollovers are correctly documented, including the amount, type and breakdown of components. Where more than one member receives material contributions, either a minute or a signed contributions report should confirm which member received what contribution/s.

Also remember the ATO is now focusing on record-keeping and contributions as a key area of concern through its compliance program. It is scrutinising annual returns more carefully and has identified that:

1. Re-reporting of contributions to correct an error immediately after notification of a potential excess contributions tax liability suggests the re-reporting is aimed at reducing the liability.
2. Taxpayers may have sought to fund contributions from income sources that have not been properly taxed. One example is in-specie contributions to SMSFs at less than market value that may not have been treated properly for capital gains tax purposes.

The ATO is also reviewing deductions for personal superannuation contributions to ensure claimants are entitled to these deductions. To be eligible, the member must provide the trustee with a signed notice of intent to claim a deduction (NAT: 71121) by the earlier of:

• the time they lodge their personal income tax return for the financial year during which the contribution was made, or
• the end of the financial year following the year the contribution was made.

What happens at audit?

One of the fundamental questions faced by SMSF advisers is what will happen at audit when a fund exceeds its contribution caps.

The answer is that exceeding the contributions isn’t a reportable SMSF audit issue and an auditor contravention report (ACR) won’t get lodged with the ATO.

However, SMSF auditors are obliged to report on Superannuation Industry (Supervision) Regulation 7.04, which deals with the conditions under which the fund can accept contributions from a member.

A fund may accept all contributions up to the caps limits, but must return contributions that exceed the caps within 30 days of becoming aware the amount was received in a manner inconsistent with the legislation, such as:

1. A lump sum contribution, which in one go exceeds the member’s annual non-concessional limit (for those aged 65 or over).
2. Exceeding the three-year bring-forward limit (for those under 65).
3. Where the member hasn’t supplied their tax file number.
4. Contributions for people who are 65 or over and not employed (there’s a budget proposal to abolish the work test).

Only the excess must be refunded, not the whole contribution. And when the fund doesn’t return the excess within 30 days of becoming aware of the excess, the auditor is obliged to qualify the audit report.

Where the amount of the excess is more than 5 per cent of fund assets or $30,000, then the auditor is required to report this to the ATO through an ACR.

Excess contributions in the future

When an SMSF auditor becomes aware a member has exceeded their contribution limits, they will communicate this to the trustees via a management letter.

Typically, the management letter would include a comment advising trustees about the excess and that the ATO will issue a notice of assessment regarding the excess contributions.

Even though the revised budget proposals for SMSFs have not passed through legislation, ensuring SMSF compliance for your clients’ SMSFs has never been more important during this uncertain time.

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