An important reminder on excess contributions: Purcell and Commissioner of Taxation [2020] AATA 4235

The recent AAT decision of Purcell and Commissioner of Taxation [2020] AATA 4235 serves as an important reminder when making superannuation contributions.

Facts

For the full decision, see http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/AATA//2020/4235.html. A summary of the fact is as follows.

The AAT indicated that during the financial year ended 30 June 2018, Mrs Purcell had a non-concessional contributions cap of $0. The AAT also indicated that Mrs Purcell’s total superannuation balance just before the start of the financial year ended 30 June 2018 was $999,362.46. I therefore infer that her non-concessional contributions cap was nil due to her ‘maxing out’ her non-concessional contributions cap in early financial years.

On 21 and 22 May 2018 Mrs Purcell and her husband respectively made voluntary superannuation contributions for Mrs Purcell. These contributions totaled $4,000 and constituted non-concessional contributions.

Accordingly, Mrs Purcell had excess non-concessional contributions of $4,000.

On 13 February 2019 the Commissioner of Taxation advised Mrs Purcell of her excess non-concessional contributions. The Commissioner then made an ‘excess non-concessional contributions determination’. The determination included, among other things, the rate of taxation that the contributions will attract if they are not released and the amount of ‘associated earnings’.

The associated earnings were essentially calculated as:

• the average of the general interest rate for the financial year ended 30 June 2018, calculated on a daily rate (ie, a daily rate of 0.02391781%, which is derived from a per annum rate of 8.73%); multiplied by
• the number of days from the start of the financial year in which the contributions were made to when the Commissioner makes the determination — that is, the number of days between 1 July 2017 and 13 February 2019 (ie, 593); multiplied by the amount of the excess ($4,000).

I personally calculate the associated earnings to be $567.33 (ie, 0.02391781% x 593 x $4,000). However, the Commissioner of Taxation calculated it to be $609. I am baffled as to how $609 is derived. However, the AAT noted that ‘[t]here was no issue between the parties that the application of the formula resulted in a total of $609’.

Nature of the dispute

Naturally, if Mrs Purcell elected to release the excess, 85% of the associated earnings must also be released and the associated earnings are included in her assessable income. Accordingly, it is beneficial for a taxpayer to have associated earnings that are as a small as possible.

Mrs Purcell did not ask for the Commissioner to disregard or reallocate the excess non-concessional contribution, but rather objected to the excess non-concessional contributions determination itself.

She appears to have had two reasons for this objection.

Firstly, she appears to have claimed that the earnings rate (ie, an annual rate of 8.73%) was too high and effectively a penalty. I infer that the actual earnings rate in the fund was lower than 8.73%.

Secondly, she appears to have claimed that it was unfair that the proxy rate was applied to the excess amount not from the date the contributions were actually made (in May 2018) but rather from 1 July 2017.

AAT’s finding

The AAT rejected the notion that the associated earnings constitute a penalty. Instead the AAT seemed to consider that the calculation of the associated earnings is merely the result of the application of fairly mechanical legislative provisions with no discretion for the Commissioner to remit the size of the associated earnings. The AAT did not expressly state this in the decision, but the AAT has no greater power than the Commissioner under the original legislation. Therefore, as the Commissioner had no discretion, neither did the AAT.

Accordingly, the AAT decided to affirm that the determination was valid.

Lessons

The decision serves as a reminder of several lessons:

• Associated earnings are calculated using what can seem like a relatively high rate, which is not at all linked with the actual earnings rate experienced by a superannuation fund. Unfortunately, there are not many helpful observations that can be made in this regard, other than perhaps the following (which admittedly is trite): once a contribution is made to a superannuation fund, in case that contribution later turns out to be an excess contribution, try to ensure that the contribution generates as high a return as possible.

• The associated earnings are calculated as if the excess was contributed to the superannuation fund on the first day of the financial year. Accordingly, all things being equal, one should try to make any large non-concessional contributions earlier in the financial year, in case that contribution later turns out to be an excess contribution.

Related articles

• Excess concessional contributions charge

• Triggering your bring forward non-concessional contributions cap post-1 July 2017

• Can a super fund reject excess contributions?

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

By Bryce Figot, Special Counsel ([email protected]) DBA Lawyers

2 November 2020