New fact sheet provides relief for accidental cap breaches
SMSF members who exceed their concessional contributions cap due to late payment of an SG contribution by an employer are likely to be granted relief from the ATO, with a recent fact sheet from the regulator pointing to greater discretion when disregarding excess contributions from employees in this scenario.
The fact sheet, released earlier this month, outlines scenarios where individuals may be able to have some of their SG contributions disregarded or reallocated to another financial year if they have breached their contributions cap through remedial SG payments.
“We will consider an employee’s application and decide whether to reallocate or disregard the remedial SG contributions,” the ATO states.
“When checking whether we can exercise this discretion, we consider whether making the remedial SG contributions results in unfair or unintended outcomes; whether the employee had control over the circumstances that led to [the] remedial SG contributions; whether it was reasonably predictable that the remedial contributions would result in the employee exceeding their contributions cap; [or] whether the contributions would be more appropriately allocated to another financial year.”
DBA Lawyers director Daniel Butler said the new guidance amounted to a slight softening of the ATO’s previous position on this issue, which had been to consider a much narrower set of circumstances when deciding whether to disregard excess contributions.
“Previously in PS LA 2008/1, the commissioner has been pretty tight-fisted as to when he will exercise that discretion — the one overriding thing he said was where it was out of the employee’s control, he would exercise discretion,” Mr Butler said.
He added that given the new guidance, individuals or advisers with clients in this position could consider applying to the ATO to have the excess contributions retrospectively added to the previous quarter in which they were meant to be paid.
“You could have an argument, for example, that someone thought they were a contractor and didn’t expect SG contributions, but it was ultimately held by the commissioner that they were an employee and the principal of the firm should have paid SG on their payment,” Mr Butler said.
“I would argue what you would want to do is reallocate it, because it is a lot easier for the commissioner to reallocate than to ignore, so the argument should be that you should have got the payment in that previous quarter if they had done the right thing.”
However, he added that it would be more difficult for clients with a salary sacrifice arrangement on top of their SG to argue that they had inadvertently breached the contributions cap in this scenario, as salary sacrifice was broadly thought of as up to the individual and their employer to manage.
“I only know of one [salary sacrifice] case where the person got up, because there was a condition in their contract that said the employer had to get their contributions in within these specified periods; therefore, the employee had a reasonable expectation that the employer would abide by the contract,” Mr Butler said.