SMSF members entitled to a compensation payment should be aware it could exceed their contribution caps and may have to take action to avoid triggering an excess or bring-forward arrangement, DBA Lawyers director William Fettes has said.
Speaking during a recent online briefing, Fettes stated a compensation amount received by a super fund due to a determination from the Australian Financial Complaints Authority or the Compensation Scheme of Last Resort would generally count as a cap-tested contribution but the relevant limit was dependent on who engaged the financial services provider and who had a legal right to the compensation.
“If it was paid by the relevant provider, but at the members direction…it’s essentially an after tax, non-concessional contribution in the year of receipt,” he explained.
“The only way it might become concessional is if the member then files a notice of intent and claims a deduction, so it becomes a personal deductible contribution.
“If the compensation is paid by the provider directly to the fund and not at the members direction, it’s a payment on behalf of the member by someone else, and that is concessional contribution in the year of receipt.”
“If it was paid to the member personally and then contributed to super then it will be treated as a non-concessional contribution in the year of receipt, unless a personal deduction is claimed in which case it’s a concessional contribution.”
“If neither the individual member nor the trustee of the SMSF had the right of compensation, that’s still a contribution by someone else, so a concessional contribution.”
Fettes added understanding how these compensation payments would be received in fund was important to allow SMSF members to manage contribution risks.
“If receiving compensation, we need to think about the contributions that might happen in that year,” he suggested.
“With limited cap space under the concessional contribution cap the unused carry forward cap space can be a thing that can assist in that regard, and with the non-concessional contribution cap we can use any applicable bring forward.
“However, there may not any cap or ability to use [the bring forward provisions] based on the member’s individual total super balance and [in those circumstances] large compensation amounts are going to trigger excess concessional and excess non-concessional contributions consequences.
“These payments have to be looked at very carefully as [cap treatments] depend on where you end up with who engaged the service provider and who had the right to the compensation.”
