In a recent blog, SuperConcepts executive manager of SMSF technical and private wealth Graeme Colley said trustees needed to consider “putting in place some checks and balances” to ensure a fund did not accept ineligible contributions, as there could be serious compliance consequences for members, trustees and the fund itself.
“Trustees can be personally penalised for a breach or the fund could have its compliance status put at risk,” Mr Colley said.
“The reason is that you are responsible as the fund trustee to check whether the contribution should have been accepted on receipt.”
Mr Colley said funds were prohibited under the SIS Act from accepting contributions from members who were over 65 and no longer working, or had not provided their tax file number to their fund.
In most other situations, once the contribution was accepted, it could not be refunded, unless a “legal mistake” had occurred, such as investment income being paid into a member’s super fund in error rather than to the member personally.
“Legal mistake involves the receipt of the contribution when it was a payment intended for someone else or the contributor thought they had a legal obligation to contribute which did not exist,” Mr Colley said.
“For a contribution to be treated to be made by mistake, the courts consider that the contribution would not have been made if the contributor knew it was a mistake at the time the contribution was made.”
Mr Colley said this did not apply to instances where the member may have simply made a contribution and regretted it later, and used the example of a 2010 ATO ruling where a member and trustee made a $1 million contribution to their fund, then refunded part of this to themselves so they would remain within the contribution limits.
“The ATO considered that no legal mistake occurred which would have allowed the relevant refund as the trustee should have recognised the issue at the time the contribution was made,” he said.
“They also considered that the amount refunded to the member should be repaid to the fund; otherwise, penalties would be imposed.”
If a fund had accepted an ineligible contribution, they were required to refund it to the member within 30 days of receipt, or in the case of a contribution made in error, within 30 days of when the error was discovered, Mr Colley said.
Mistakes happen. Who hasn’t accidentally transferred money in their internet banking to an incorrect account? I know I have. The distinction is whether it was truly a mistake or just a change of mind. [url=http://https://www.ato.gov.au/law/view/document?docid=AID/AID2010104/00001][/url]
Some time ago, there was a thought process that one could have deed clauses which accepted a contribution but then allowed mechanisms for it to be refunded if the deed clause said it could be returned. Some common examples were perhaps that a contribution is not deemed to be accepted until the end of the FY when the trustee has sought advice from their advice specialist?
I wonder how effective these deed clauses are / could be around the validity of acceptance of the contribution?
Assuming such a clause could be effective legally, if a contribution is not deemed accepted until the end of the financial year that could create a problem in the event of the death of a member for whom contributions that have been made during the year of death (but would be deemed not to be accepted at the time of death), and for employers making Superannuation Guarantee Contributions, salary sacrifice contributions etc.
Absolutely agree. Many complications could arise but I think it is worth pointing out that SMSFs are inherently trusts and under trust law, with relevant deed clauses, one could insert many overlays around issues which impact SIS and Tax. It’s the interaction of trust law with SIS and Tax laws (particularly application of Part IVA) which makes it complicated but I think this was in the ATO’s radar
around 1 July 2007 when the super caps first came into place.
Agree that if such deed clauses could be inserted, there will likely be complications on issues such as tax on the earnings in the period between acceptance and refund, potential SIS compliance with allocation of contributions rule (SISR 7.08) etc
Good article. You should also ensure that deeds are up to date for these matters. There are a lot of old deeds out there that do not even consider the contribution caps, TSB & payments to ATO under release authorities
If the trustee recognised that the contribution could not be accepted at the time, then they wouldn’t have deposited it!
The trustee IS the member, and is required by law to be.
When are the regulators going to stop this ridiculous charade that a trustee and member are 2 diffferent people, required to write letters to themselves, and have non-sensical non-existent meetings and talk about themselves in the third person and pass resolutions about themselves as if they were not right there!
A mistake can only happen AFTER something occurs, otherwise it wouldn’t BE a mistake!
There should be some allowance for rectification of mistakes like this. It is not like the super rules are easy!
You will never get a standard of behaviour from a SMSF trustee that is expected of a Trustee of a large fund, and it is a fools errand to expect it.
If the regulators dont like that, then have the guts to recommend to Government a ban on SMSFs altogether and stop this stupid pedantic enforcement charade.
A very, very sensible comment!