Speaking in a recent webinar, Hayes Knight director of SMSF services Ray Itaoui said that, in some cases, SMSF professionals are incorrectly classifying accidental withdrawals from the fund as a trustee error, and redepositing the funds, when it should really be treated as a withdrawal and re-contribution, and in some cases a contravention may need to be reported.
Mr Itaoui gave an example of a member who is 66, retired, with all benefits in pension phase. The member “accidentally” withdraws $50,000 and puts the money back into the fund three days later.
While many SMSF practitioners might say to simply treat this as an error in the accounts, Mr Itaoui said, in his opinion, this is incorrect.
“What I believe the correct response would be in this scenario is to treat it as a withdrawal and re-contribution,” he said.
“You can see that the member is 66, retired and has accidentally withdrawn $55,000. That could be a scenario where he has all his accounts with Commonwealth Bank, he logs on to his net banking and the super fund, family trust and personal accounts are all linked on there, and so he accidentally transfers money from the super fund instead of the family trust. He realises the mistake and puts the money back into the fund.”
Having a mistake based on a trustee error is not sufficient for the purposes of reversing the withdrawal from super, he said, so it would be classified as a withdrawal from the super fund.
“Due to his age and the fact they he hasn’t met the work test, he can’t put the money back in, and putting the money back in means that the amount is now a contribution to the fund,” he explained.
“As per TR 2010/1, a contribution is anything of value that increases the capital of a superannuation fund so this correction of the error becomes a contribution to the fund, which he can’t make as he hasn’t met the work test . SIS regulation 7.04 says that amount has to be refunded, and that creates multiple breaches and multiple considerations.”
Mr Itaoui said that, where SMSF practitioners come across this in practice, they should call their auditor.
“If you’re treating it as an error, I believe that’s incorrect and the ATO using their data matching will potentially pick up on this as well,” he cautioned.
“If the ATO was to come along and do an audit on the fund where this is simply recorded as an error, there could be mandatory penalties that apply for breaching the SIS regulations.”
He also noted that he believes that the law of restitution would not apply in this scenario.
“As I said before, the fund could not accept contributions and that creates a breach, and this may need to be picked up as a creditor in the accounts because it’s not an excess contribution, it is a disallowable contribution. If it was an excess contribution, the fund could potentially hold that amount and release it from the fund once the ATO gives the authority to release the excess contribution ,” he explained.
“It’s a breach because the fund was not allowed to accept contributions because the member hadn’t met the work test.”
In fairness to Ray, I wouldn’t rely on restitution of a mistake material that you provide to return a payment in error.
The guidance we have on this page is in relation to returning contributions. Yes, common sense and extrapolation of concept should mean that it should apply to returning payments in error.
How confident are we that legal concepts of restitution of a mistake apply equally to returning payments in error as they apply to returning contributions
Another ‘expert’. Ho hum.
The scenario described is clearly a payment by mistake from the incorrect account and is addressed under the law of restitution. Clearly there is no intention to withdraw money from the Fund, and the error is corrected within a reasonable time. Further, there is clearly no intention to make a contribution to the Fund, but merely to rectify the error. I suspect Mr Itaoui has not dealt with the ATO in practice on this matter and is misinterpreting the law.
I made a voluntary disclosure about a transaction error a lot more than $50K, ATO allowed me to return the funds and interest back to my SMSF. I was under preservation age and it was 18 months later including across a financial year. Full praise to ATO.
Well, it’s time to lobby the government to change the law to allow fixing this error. The law needs to keep up with the electronic banking age.
What would you do if the Trustee is under preservation age and mistakenly did the withdrawal ?
What Ray is saying is the letter of the law. However, has anyone experienced the ATO being this pedantic? As humans, we do make mistakes and the older we get, errors happen more frequently. Even if it involves the ATO turning a blind eye when they have no discretion, I would have thought the ATO would only exercise this sort of harsh reality when a trustee had a history of abuses of the law.
Mistakes happen and, identifying the purpose of the transaction, would be the way any sensible professional would judge this. If the $50,000 goes from superfund to bank account back to superfund in a matter of days, it would seem there is an argument it was a genuine mistake.
As with all exercise of professional judgement, looking at a transaction in isolation will provide limited insight.
If a SMSF trustee makes a habit of carelessness, perhaps a sterner approach is warranted, but a one off, with no evidence of intent, should result in a warning in the Audit Management Letter and possibly an ‘Except For’ Audit Report if the amount in question was material.
I believe Mr Itaoui is incorrect. There is a ruling put out by the ATO that states that errors can be corrected. I can’t recall the exact ruling number but it exists. The situation he describes is a genuine error. Why shouldn’t it be able to be corrected? That is grossly unfair. Everyone is human and makes mistakes sometimes. No-one should be penalised for a genuine error that is corrected as soon as it is discovered and does no harm.
Seem like Ray Itaoui is plainly scaremongering and plain wrong. Pleas recognise that error or mistakes happens. If it is once off and within 3 days, and a genuine error – I cannot see his view that it cannot be restituted. Maybe before publishing, the publisher should really check the piece. The law of restitution is well established. The ATO recognise this:
https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSF-technical/Returning-contributions/?anchor=Restitutionformistake#Restitutionformistake