TR 2010/1: Did the ATO get it right? Liwszyc v Commissioner of Taxation tells all!

In taxation ruling TR 2010/1 the ATO consider what is a contribution to a superannuation fund and when a contribution is made. A recent court case, Liwszyc v Commissioner of Taxation [2014] FCA 112, answers the question of whether the ATO actually got it right in TR 2010/1. Liwszyc v Commissioner of Taxation also contains tips that advisers must be aware of.

The facts of Liwszyc — what a difference a day can make!

(The following are highly simplified facts — for the full facts, see Liwszyc v Commissioner of Taxation [2014] FCA 112.)

Mr Liwszyc was the sole director of Southern Fluids Technologies Pty Ltd (‘SFT’).

On 30 June 2009 the bookkeeper of SFT made two superannuation contributions in respect of Mr Liwszyc. The payments were made via BPay. However, the superannuation fund (AMP Superannuation Trust) did not show the contributions as having been received until 1 July 2009.

Naturally, this meant the contributions were recognised in the 2010 financial year instead of the 2009 financial year. This was despite Mr Liwszyc’s evidence that the payments were clearly marked that as being for the 2009 financial year.

This meant that Mr Liwszyc had excess concessional contributions and thus excess concessional contributions tax!

(Note that the introduction of division 291 of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’) means that these facts would no longer give rise to excess concessional contributions tax, however, they could still have negative tax implications.)

Mr Liwszyc wrote to the ATO requesting that the contributions received on 1 July 2009 be allocated to the previous financial year under s 292-465 of the ITAA 1997.

The Commissioner declined to disregard or allocate the contributions and the excess concessional contributions tax bill stood.

Mr Liwszyc appealed the treatment of the contributions to the Federal Court.

In considering the case, McKerracher J provided a detailed consideration of what is a contribution and when it is made. He also considered certain aspects of TR 2010/1 in detail.

In TR 2010/1, although the ATO did not have much case law directly on point, the ATO adopted the view that:

… a contribution is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.

McKerracher J did not expressly consider whether this definition of ‘contribution’ is accurate. However, he did agree with the ATO that:

… ‘contribution’ should be given a construction which would promote the purpose or object underlying Pt 3-30 [of the ITAA 1997]. Part 3-30 is a scheme attracting tax consequences to, amongst other things, the making of contributions to superannuation providers, this being, in turn, intended to promote the object of enabling taxpayers to provide for their retirement, in turn, attracting obvious public policy benefits.

McKerracher J analysed when a contribution is made. He quoted from TR 2010/1 that:

An amount set aside but not actually paid is not a contribution. It is well established that the making of a journal entry in the books of an entity does not alone establish a payment. However, an actual payment, albeit to reimburse the superannuation provider for an expense incurred in operating the fund, may constitute a contribution.

…

A contribution of funds as cash or an electronic funds transfer, is made when the amount is received by the superannuation provider or credited to the relevant account.

He found that ‘a contribution does not become a contribution at all until the point of time at which it is actually received.’

Accordingly, he found that:

… in the case of a contribution of funds by way of an electronic funds transfer, the contribution will be made when the amount is received by the superannuation provider or credited to augment the relevant account. In contrast to this, Mr Liwszyc argues that a contribution made by electronic funds transfer, in this case BPay, occurs as soon as the contributor has done everything necessary to effect a payment.

This was good news for the ATO, as it was completely consistent with TR 2010/1. However, it was bad news for Mr Liwszyc.

Were these special circumstances?

McKerracher J also considered whether there were special circumstances that were sufficient to allow the ATO to disregard or reallocate the contributions. Mr Liwszyc submitted that the circumstances were special. However, McKerracher J disagreed, instead holding that:

simple errors of this nature do not constitute special circumstances: see Tran and Commissioner of Taxation [2012] AATA 123 (at [15]). An innocent mistake or ignorance of the law does not in itself constitute a ‘special circumstance’ nor do simple errors, albeit innocent errors or other mistakes which are made in good faith. Equally, the fact that an error was made by another person does not in itself constitute ‘special circumstances’.

Lessons for advisers

Liwszyc v Commissioner of Taxation confirms the ATO position in TR 2010/1 regarding the timing of electronic payment, such as BPay. Contributions are not necessarily made when a contribution leaves the contributor’s account. Rather, they are made when the superannuation fund trustee receives the money.

As McKerracher J noted:

[i]n an electronic age it may seem surprising that funds are not transmitted/received in “real time” or near to it’

Accordingly, electronic payments close to or on 30 June run an extremely highly risk of being made in the next financial year.

So, what should an adviser do in respect of a client who calls them on 30 June saying that they want to make a contribution on that day?

There is a possibility that might work, although it is somewhat untested.

McKerracher J’s reasoning that electronic payments occur when received relied upon the contractual terms of Australia’s electronic payment systems.

However, TR 2010/1 notes that a contribution (albeit under the heading of ‘in specie’) can be made not just by creating a ‘contractual right [but also by creating another] legal or equitable right in the superannuation provider that did not previously exist’.

Accordingly, the following might be able to ‘save the day’. A contributor finds him or herself on 30 June without having made their contribution yet. They declare that the money is now being held on a bare trust for the superannuation fund. They immediately alert the superannuation fund to this. As soon as possible, the contributor perfects the title and transfers the money to the superannuation fund.

I stress though that this is novel and untested.

Other decisions where timing via an intermediary account was relevant

This is not the first excess contributions tax decision where a contribution being delayed before being received by the superannuation fund trustee was relevant. The following provide interesting reading and resulted in similar unsuccessful outcomes for the taxpayer:

Paget and Commissioner of Taxation
Chantrell and Commissioner of Taxation
Rawson and Commissioner of Taxation
Colless and Commissioner of Taxation
Verschuer and Commissioner of Taxation

Conclusion

The far better lesson from Liwszyc v Commissioner of Taxation is that the parts of TR 2010/1 quoted in the judgment is an accurate reflection of the law. Thus, contributors, even if paying electronically or via another intermediary such as a bank, should make their contributions are received by the fund trustee well before 30 June.

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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.