An SMSF trustee is required to reject contributions in certain circumstances. This rejection rule can prove very helpful for overcoming an excess non-concessional contribution (‘NCC’). Advisers must be aware of how this rule works if they seek to rely on it.
Fund-capped contributions can be rejected
Regulation 7.04(3) of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (‘SISR’) imposes a maximum cap on any one contribution to a fund. The rule can come in very handy to overcome excess NCCs.
The trustee of a fund generally must not accept an NCC if that particular contribution is greater than the member’s NCC cap. Thus, an SMSF trustee must not accept any ‘fund-capped contributions’ in a year that exceed:
- if the member is 64 or less on 1 July of the financial year (‘FY’) — three times the amount of the NCC cap; or
- if the member is 65 but less than 75 on 1 July of the FY — the NCC cap.
‘Fund-capped contributions’ are member contributions, or more specifically, contributions that are made by, or on behalf of, a member, but does not include employer contributions. More specifically, fund-capped contributions does not include:
- a contribution to which a valid and acknowledged notice under s 290-170 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’) exists (eg, a member claims a deduction for part of their contribution as an eligible person under s 290-150 of ITAA 1997);
- a contribution that qualifies as a structured settlement or orders for personal injury under s 292-95(1)(d) of ITAA 1997;
- a contribution that qualifies as a CGT exempt component under s 292-100(9) of ITAA 1997; or
- a Government co-contribution.
What amount must be rejected?
Colloquially this rule is referred to as the ‘rejection rule’ and is intended to prevent members from inadvertently contributing more than their NCC cap. This limit applies under reg 7.04(3) and (4) but only if a single discrete contribution exceeds the ‘fund-capped contributions’ limit. (Note, the regulations are open to a different legal interpretation but the regulatory view is that it applies on a discrete contribution by contribution basis. In this article, we outline the ATO’s view.)
The rejection rule only applies where a single discrete contribution is in excess of the relevant cap. It does not apply, for instance, if there are several separate contributions each of which is below the fund capped contributions limits but together exceed the limit.
Consider George. George is 65 years old at 1 July 2014.
George — albeit mistakenly — assumes that he can utilise the ‘bring forward’ provisions and contribute $540,000 into his SMSF.
On 30 May 2015 George transfers $180,000 to his SMSF. On 1 June 2015, George transfers another $180,000. Again, on 30 June 2015 George transfers another $180,000. All transfers are by way of EFT.
Each contribution that George made to his SMSF is consistent with his fund-capped contributions rule for FY2015. That is to say, viewing each contribution separately, none of the contributions are in excess of his contribution caps. Accordingly, no amount can be rejected by the SMSF trustee under reg 7.04(4) of SISR.
Again consider George from the example above.
Instead of making two contributions on 1 and 30 June 2015, George makes both on the same day (ie, $180,000 on 30 May 2015 and $360,000 on 1 June 2015).
Broadly the SMSF trustee would have 30 days from 1 June 2015, in which to reject the $180,000 in excess of George’s NCC cap in relation to the contribution received on 1 June 2015. However the other $180,000 that was received on 30 May 2015 would be treated as an excess NCC for FY2015.
The treatment of this excess NCCs will be discussed further in section 4.8.
Do ATO materials shed any light?
As discussed above, it is important to understand how the fund-capped contributions rule applies in practice as reflected in ATO materials. We now examine these ATO materials.
No aggregation of contributions
ATO ID 2007/225 confirmed the ATO’s view that you do not aggregate contributions during a FY to determine whether a contribution that exceeds a member’s fund-capped contributions limit must be returned. The ATO referred to item 80 of the Explanatory Statement for the Superannuation Industry (Supervision) Amendment Regulation 2007 (No.1) (‘Explanatory Statement 2007’) which gives guidance on determining if a contribution is a fund-capped contribution by clarifying the words ‘fund-capped contributions in respect of a member’. It states:
To help prevent a person from inadvertently contributing more than the non-concessional contributions cap, new subregulation 7.04(3) provides that superannuation funds will be required to return an amount of certain member contributions that exceed the cap.
Superannuation funds will not be required to aggregate the total of member contributions received for a person either within the fund or across other funds. The rule applies on a contribution-by-contribution basis, not a yearly basis or any other basis. This measure will reduce the instances of inadvertent breaches where the contribution is a one-off in a financial year.
Only the excess is refunded
ATO ID 2008/90 also referred to the Explanatory Statement 2007 and confirmed the ATO’s view that it is only the amount in excess of the relevant amount that is required to be returned. It states:
To help prevent a person from inadvertently contributing more than the non-concessional contributions cap, new subregulation 7.04(3) provides that superannuation funds will be required to return an amount of certain member contributions that exceed the cap…
In this case, the amount of $2,000 is required to be returned to the member as $2,000 is the amount that the contribution of $452,000 exceeds three times the non-concessional contribution cap for the 2007-2008 financial year of $450,000.
Refunds must still occur even if beyond 30 days
ATO ID 2009/29 confirmed the ATO’s view that a trustee is still required to return the amount of a contribution that has been accepted inconsistent with reg 7.04(3), even if more than 30 days has expired since the trustee became aware of the excess NCCs.
For completeness, caution should be applied before rejecting a contribution if it has been received for over 30 days. While this regulation states that the 30 day time period starts from the person ‘becoming aware’ of the contribution, the ATO take a strict view that if a contribution is accepted, the trustee immediately becomes aware its existence. The ATO do not accept that a person becomes aware when they form the subjective knowledge that the contribution was not meant to be received by the superannuation fund. (This is another point on which legal opinion differs to the regulatory view.)
Furthermore, note that, technically, a contravention of the operating standards may have occurred and an auditor contravention report may need to be lodged if a member’s NCC’s exceed their fund-capped contribution limit and the trustee does not reject the excess within 30 days. (The operating standards for regulated superannuation funds in s 31(1) of Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’) states that the [SISR] regulations may prescribe standards applicable to the operation of regulated superannuation funds and s 31(2) sets out the types of standards which includes in paragraphs (c) and (d) the amount and circumstances in which a fund may receive contributions.)
What if shares in different companies are contributed?
ATO ID 2012/79 confirmed the ATO’s view that an in-specie transfer of three parcels of shares in three different listed companies (with each parcel consisting of shares of the same class) from a member of the fund were each to be treated separately under the fund-capped contribution rule. Thus, as the combined value of all the shares transferred exceeded the member’s NCC cap for the FY in which the transfer occurred, an excess NCC arose.
Again consider George from the example above.
Instead of making contributions by way of EFT, George transfers two discrete bundles of shares in two different companies (both having ordinary shares). On 30 May 2015 both bundles of shares are transferred to his SMSF. The shares are independently valued at $60,000 and $130,000.
Each parcel of shares is considered a separate contribution for the purposes of reg 7.04(3) of the SISR. Therefore as neither the $60,000 nor the $130,000 contribution exceeds the fund capped contribution cap, the SMSF trustee is not required to reject these contributions. Thus an excess NCC of $10,000 arises.
The facts of this example have been adopted from ATO ID 2012/79.
SMSF deed must authorise a rejection
The SMSF’s deed or governing rules should also be checked to ensure that they allow the trustee to reject or return contributions. Where these rules do not allow such a course of action, appropriate remedial action should be taken to ensure that this is covered before any contributions are returned to fund members.
Some governing rules of funds have express powers requiring a rejection of excess contributions and some of these apply on an aggregate basis. Expert advice should be obtained as generally a trust deed must be followed.
The above rule can prove handy in overcoming an excess NCC. There are some finer details to the rule that must be understood before rejecting an excess amount. SMSF deeds must be checked.
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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.
Note: DBA Lawyers hold SMSF CPD training at venues all around Australia and online. For more details or to register, visit www.dbanetwork.com.au or call Marie on 03 9092 9400.