A common misconception among SMSF advisers and trustees about how the non-concessional contributions cap is applied can lead to errors when trying to rectify a breach of these limits, a sector specialist has said.
Heffron SMSF Solutions managing director Meg Heffron told delegates at Class Connect 2019 in Sydney last week that the misunderstanding arises when an individual has a total super balance of at least $1.6 million.
“[These people think] I’m not allowed to make non-concessional contributions. Is that how you would often express it or think about it? Not allowed to make non-concessionals?” Heffron said.
“You actually are [allowed to make non-concessional contributions], it’s just the cap is zero.”
She pointed out this means a non-concessional contribution made above the cap is not an illegal contribution and therefore cannot be automatically refunded to the relevant member.
Instead, the trustees must wait for a determination and release authority from the ATO before any action to amend the situation can be made, she said.
To this point, she emphasised only money going into an SMSF as a result of genuine errors, such as money transferred to the fund’s bank account by mistake, or illegal actions, such as a member making a contribution when they are over the age of 65 and have not satisfied a work test, can be refunded to the contributor without ATO involvement.
“But with [contributions above the cap] you actually can’t give the money back to the contributor. In fact, if the contribution is too high, remember these days even if you decide to refund the excess, it’s got to go to the tax office,” she noted.
“So the last thing you want to do is give it back to the contributor because it’s got to go back to the tax office first.”