The treatment of compensation amounts paid to a superannuant will be treated differently by the ATO in regards to contribution caps, dependent on whether the fund or member engaged the service provider.
In a recent update regarding compensation stemming from inappropriate financial advice or fees for no service, the ATO stated compensation may have an impact on concessional and non-concessional contribution caps where it is received by a fund and allocated to a member’s account.
In the update, the regulator stated that where a superannuation fund engaged a financial advice service provider and had a right to seek compensation, any compensation received by the fund that was allocated to a member account would not be a contribution and had no effect on contribution caps.
This was not the case where a fund member personally engaged the service provider, where it would be either a concessional or non-concessional contribution, dependent on how it was paid to the member.
“If the compensation was paid directly by the financial service provider to your super fund other than at your direction, the compensation will be a concessional contribution in the financial year it is received by the fund,” the ATO stated.
The regulator added that where compensation was paid to a super fund member and then contributed to the fund, it would be a non-concessional contribution, as will any compensation where the member directed the service provider to pay the member compensation to the fund.
It noted, however, that a non-concessional contribution from a compensation payment “will be a concessional contribution to the extent that it is covered by a valid and acknowledged notice of intent to claim a deduction and is allowable as a deduction”.
In cases where neither the trustee of the fund, nor the member, had a right to seek compensation but received a compensation amount and it was allocated to a member account, that amount would also be considered a concessional contribution in the financial year it was received by the fund.
In recognising a compensation payment may cause a super fund member to exceed their contribution caps in a financial year, the ATO added that members could apply for the tax commissioner to exercise a discretion to disregard excess contributions or reallocate them to another year.
It stated discretion would also be dependent on who made the payment and under what circumstances it was directed to the fund.
“When an amount of compensation is correctly payable to you but it is paid directly to your super fund, we will generally consider the payment to have been outside of your control if you have no control over whether the contribution is paid, when it is paid or who it is paid to,” it said.
“In those circumstances, we may consider it appropriate to exercise the discretion so the contribution arising from the compensation payment does not count towards your contributions cap in the year in which it is made.
“If the compensation is paid to you and you contribute it to your super fund, or you direct the financial service provider to pay the compensation to your super fund for your benefit, we would be unlikely to exercise the discretion on the basis of that circumstance alone as making the contribution would have been within your control.”
