In December last year, the ATO published a draft Law Administration Practice Statement, PS LA 2021/D3, which explained when and how the ATO would apply discretion in section 304-10(4) of the Income Tax Assessment Act 1997 where a taxpayer receives a superannuation benefit in breach of the legislative requirements.
It has also published a draft tax determination, TD 2021/D6, which clarified the tax treatment of a superannuation benefit where a commissioner exercises the discretion in subsection 304-10(4).
In a submission to the ATO’s consultation on the draft guidance, the SMSF Association outlined that the example included in TD 2021/D6, which involves a pension paid from an APRA-regulated superannuation fund, is of little value as it covers a very specific set of circumstances in the context of an APRA fund member.
“The determination would benefit from the inclusion of examples to assist SMSFs better understand how the Commissioner may exercise his discretion,” the submission stated.
It also made a range of requests in relation to PS LA 2021/D3, including a request that the Commissioner reconsider his view in relation to “attempted rectification”.
PS LA 2021/D3 states that attempted rectification of the transaction by paying an equivalent amount to the superannuation benefit to the superannuation fund immediately or shortly after receiving the benefit in breach is a factor unlikely to provide support for the ATO exercising its discretion favourably.
The submission stated that “trustee behaviour which demonstrates a willingness to rectify, should be considered a relevant factor, otherwise the consequences can be unintended or unjust”.
“For example, treating a rectification as a contribution has the potential to apply multiple layers of tax and penalties,” the submission noted.
In considering the meaning of “unreasonable” in the context of ITAA97 section 304-10(4), the SMSF Association said the Commissioner should also consider other tax consequences that flow from the breach.
The submission referred to a tribunal decision where senior member Walsh considered the meaning of “unreasonable” in the context of section 304-10(4) at (37) deciding that:
“… the tribunal considers that it may be ‘unreasonable’ to include a superannuation benefit paid in breach of the legislative requirements in a persons’ assessable income (with the result that it is taxed at marginal tax rates) in circumstances where, for example:
“(i) This would be in addition to other taxation consequences which flow from the breach. For example, a superannuation fund no longer gets the benefit of an exemption or becomes noncompliant for the relevant tax year); and/or …”
The submission also urged the Commissioner to consider the interaction with TR 2013/5, which outlines when a superannuation income stream commences and ceases.
“For example, where an SMSF trustee underpays a death benefit income stream, the pension will cease in accordance with TR 2013/5 as at the start of the relevant income year,” the submission noted.
“This means any withdrawals throughout the relevant year will be treated as lump sum payments rather than pension payments. This is at risk of an inadvertent breach of the death benefit cashing restrictions in Superannuation Industry (Supervision) Regulations 1994, Regulation 6.21 where more than two lump sums withdrawals are made.”
The operation of TR 2013/5 should also be considered in the context of imposing “unreasonable” tax consequences, it added.
Expecting the ATO to be reasonable these days is asking too much.