The ATO’s recent draft Law Administration Practice Statement, PSLA 2021/D3, outlines when and how the Commissioner can apply discretion where a member receives superannuation benefits in breach of legislative requirements.
It says that where the Commissioner exercises this discretion, the super benefit will not form part of the person’s assessable income but will instead be taxed as a super benefit.
But Smarter SMSF chief executive Aaron Dunn said the ATO’s preliminary views clearly put the onus on funds to ensure strict compliance with the payment standards, and there was very little wriggle room in situations where SMSF trustees or members got it wrong.
He said there would be different implications depending on how the ATO discretion was applied.
“The practice statement indicates that the Commissioner’s discretion in subsection 304-10(4) should generally be exercised where there are no tax avoidance implications, and ‘the excessive benefit arose fortuitously or in other circumstances beyond the effective control of the recipient or the employer’,” he said.
“In exercising discretion, subsection 304-10(4) requires consideration of: the nature of the fund that the super benefit is paid from – different weighting may likely be given to particular factors depending on whether it was paid from an SMSF or APRA regulated fund; and any other matters the Commissioner considers relevant.”
The ATO said that factors around the nature of the fund would influence its exercise of discretion, such as how much effective control the recipient of a benefit had. If a benefit arose in circumstances that were genuinely out of the effective control of the person, this might support the ATO exercising discretion in the individual’s favour.
Mr Dunn said that if a super benefit had been accessed under an illegal early release scheme, the ATO would generally not exercise the discretion.
“This is the case even where the person loses the benefit of the funds due to fraudulent activity committed by another person (for example, the promoter of the scheme) after it has been released,” Mr Dunn said.
“In addition to these factors, the ATO may consider any other factors present when the amount was paid, but give little weight to anything that occurs after that time. This includes factors that are unforeseen, or that are outside the person’s control, such as a significant global financial downturn.”
Effective control and the nature of the fund
In the context of an SMSF, there was an expectation that all trustees/directors would be aware of all the relevant requirements of the SISA and the SISR pertaining to the payment of benefits, Mr Dunn said.
This included whether a member had met a condition of release, any cashing conditions attached to a particular condition of release and annual amounts required to be paid from a super income stream, including any limits on the annual amount that might be paid.
“It is in this context the exercise of the Commissioner’s discretion must consider whether circumstances are genuinely beyond the ‘effective control’ of the recipient of the benefit where the benefit is paid from an SMSF,” Mr Dunn said.
“An example of a benefit received genuinely beyond the recipient’s effective control would be where the member is in receipt of a transition to retirement income stream and a transposition error by the SMSF’s bank in responding to a request for payment leads to an amount in excess of the 10 per cent annual limit being inadvertently paid.
“This is in contrast to an APRA regulated fund that distinguishes between the trustee/member relationship regarding the operation and administration of the fund.”
Attempted rectification of the transaction
A member’s attempt to rectify a transaction by paying an amount equal to the super benefit to the super fund, immediately or shortly after receiving the benefit, was generally a factor that would be given little or no weight when considering whether the Commissioner should exercise his discretion, according to Mr Dunn.
This includes where the payment is properly recorded as a concessional or non-concessional contribution.
“The payment of monies to a fund after an amount has been paid from the fund can have no effect on whether or not that amount was paid in breach of the SISA/SISR requirements,” Mr Dunn said.
“In particular, the payment to the fund does not unwind the original payment from the fund. Whether the discretion should be exercised should be based on considerations directly related to the payment itself.”
