ATO discretion a compensation fix

compensation ATO

Financial services firms are making compensation payments to SMSFs even where no dispute exists and funds should inform the ATO to ensure no cap breaches occur.

SMSF members who receive an unexpected compensation payment that causes them to exceed their contribution caps may be able to ask the ATO to disregard it given they had no control over its arrival, according to an SMSF technical expert.

Heffron SMSF technical and education services director Leigh Mansell said the ATO recently released guidelines regarding the impact on contribution caps stemming from compensation payments made to members of an SMSF and noted some of these payments were being made before any disputes had arisen.

“A compensation payment will be a concessional contribution if a financial services provider, off their own bat with no direction from an SMSF member, sticks the money into a member’s fund,” Mansell said during a recent webinar.

“Sometimes a fund can receive compensation and the reason a financial services provider will pay money is if there is a chance in the future the member may seek to get some compensation or there may be a future issue where the member might sue so they will pay compensation now to prevent that happening.”

She said these events were happening with Heffron clients currently and the company was hearing from advisers that some financial services providers had decided it did not matter if someone had a right to compensation and it was quicker and cheaper to pay compensation than go back and trawl through historical records to identify who was owed money.

“We are hearing that some advisers are seeing funds, individuals and other entities receiving lump sum compensation where they had no right to it or they had received service for their fees, but are still receiving money in their fund because of a streamlined event for a particular financial services provider,” she said.

“What happens when a fund receives money and it breaches a contribution cap is that a member could apply to the ATO asking it to disregard it altogether or to reallocate it to another year where it belongs.

“When you ask for the ATO to exercise this discretion the normal argument you need to mount is the only reason for blowing the contribution cap was circumstances outside your control.

“For practitioners, you need to demonstrate to the ATO, for your client, that it was circumstances outside their control that caused this to happen.

“On the surface it may appear to have blown the concessional contribution cap, but depending on the numbers you may want to ask the ATO to exercise its discretion and disregard the compensation amounts.”

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