A technical specialist has recommended advisers communicate to their SMSF clients that a breach of the contributions cap is not a disastrous occurrence, regardless of how large the indiscretion is in monetary terms.
“We panic about these things because we get nasty notices from the tax office with very large numbers on them and we feel like we’ve committed a fatal sin and broken the rules,” Heffron managing director Meg Heffron said during her presentation at the recent virtual SMSF Association National Conference 2021.
“[But] don’t forget it isn’t a SIS (Superannuation Industry (Supervision) Act) breach. It’s a problem, but it’s not a SIS [Act] breach, it’s a cap breach. So [your client] has not broken the law; all [they’ve] done is create a potential tax problem.”
According to Heffron, advisers should also be mindful that the associated penalty for a contributions cap breach does not have to be paid out of the super fund, even though the ATO will assume it will be.
“We can do the sums and under certain circumstances you wouldn’t take it out of super,” she said.
If the sum is to be paid out of the SMSF, she noted it is important to choose carefully which segment of the fund it will be drawn from.
“If I was [the client], I’d take it from [the account] with all of the taxable money in it,” she said.
This course of action will result in an improved tax position, but Heffron cautioned against allowing clients to deliberately identify and create these situations to gain a tax advantage.
“One of the things you’ve got to be really careful of is [not to] let smart-alec [clients] deliberately engineer [a situation like this] because that’s tax avoidance, clearly,” she warned.
However, advisers should acknowledge situations like this can actually strengthen their advice proposition, she said.
“You can at least help remind [the client] why [they] need advice by telling [them] which [superannuation] interest to take [the penalty payment] from,” she said.