An SMSF technical expert has warned advisers and trustees to take into account the importance of managing contribution errors in the correct and prescribed legal manner.
“It is important to remember that contributions generally cannot just be returned to a member because they [either] regret making the contribution [or] they or their agents made an error in their decision to contribute,” Smarter SMSF chief executive Aaron Dunn said in a recent newsletter.
“Contributions may only be refunded in very limited circumstances prescribed by legislation. Getting it wrong can potentially lead to the fund become non-complying.”
Dunn pointed out contributions can only be returned to members if the fund was unable to accept the contribution under the Superannuation Industry (Supervision) (SIS) Act or SIS Regulations, or if the refund is authorised by the principles of restitution for mistake.
With regard to the former type of contribution error, the monies must be refunded to the member within 30 days of when the error is detected.
“For an SMSF, the ATO considers that the trustees are aware that a contribution is in breach of the law when the individual becomes aware of the contribution itself, which means from the date of the contribution being made,” Dunn said.
He pointed out some of these refunds may not take place within the prescribed 30-day period, but this does not mean the trustees are excused from returning the refund to the member.
Errors arising in this manner included situations where a contribution has been made when the member has exceeded their fund-capped contribution limit.
Dunn emphasised contributions made in error must still be reported correctly and cautioned advisers and trustees about the ATO’s strict attitude toward these matters.
“A fund must continue to report the contributions that were received, even if they were returned. The ATO makes very clear that they will scrutinise any decisions made to return contributions ‘paid in error’, albeit recognising there are many circumstances where a decision to amend will be entirely correct,” he said.
“A failure to amend would be a failure to report correctly.”
He said that, in accordance with ATO Interpretative Decision 2010/104, a trustee will be required to report the full amount of the contribution made in error on the SMSF annual return, regardless of whether it has been repaid in part or in full.