The ATO has recently released a new fact sheet that explains the impact on concessional and/or non-concessional super contribution caps where an amount of compensation is received by the client’s super fund and allocated to their account.
It also explains how clients may apply to the ATO to request the commissioner to exercise discretion in these circumstances where caps are exceeded.
“A super fund may receive compensation from a financial services provider due to the provision of inappropriate financial advice or where fees were paid but no advice provided,” the ATO said.
“The compensation may include an amount reflecting a refund or reimbursement of adviser fees and/or an amount to compensate for lost earnings. It may also include an interest component.”
The ATO noted that whether the compensation is a contribution counted towards contribution caps will depend on the circumstances in which the compensation is received.
“Where the super fund engages the financial service provider and has a right to compensation, the compensation allocated to the client’s super account will not be a contribution. Therefore, it will not affect contribution caps,” the ATO said.
“Where the member personally engaged the financial services provider and has a right to compensation, the compensation will be a concessional contribution in the financial year it is received by the fund.
“Furthermore, where there is no right to compensation, the amount will be a concessional contribution in the financial year it is received by the fund.”
If the fund engages the financial service provider and has a right to seek compensation, a trustee of a super fund will generally have a right to seek compensation where it has contracted with the financial service provider for the provision of financial advice to the fund’s members, according to the ATO.
“The compensation received by your super fund from a financial service provider in respect of its right to seek compensation and that is allocated to your account will not be a contribution. Therefore, it will not affect your contribution caps,” the ATO noted.
“If the compensation was paid directly by the financial service provider to your super fund other than at your direction, the compensation will be a concessional contribution in the financial year it is received by the fund.
“If the compensation has been paid to your super fund and allocated to your account and the compensation was paid to you and you subsequently contributed it as a personal contribution to your super fund, or you directed the financial service provider to pay the compensation that was payable to you into your super fund, then the compensation will be a non-concessional contribution in the financial year it is received by the fund.”
However, the ATO noted it will be a concessional contribution to the extent that it is covered by a valid and acknowledged notice of intent to claim a deduction and is allowable as a deduction.
If an amount was paid to the super fund and allocated to the member’s account and neither the member/trustee of the super fund has a right to seek compensation, the amount will be a concessional contribution in the financial year it is received by the fund.
The types of compensation payment as a concessional contribution or non-concessional contribution will also be subject to its respective requirements.
“If you have or will exceed your concessional or non-concessional contribution caps in a financial year, you may apply to the ATO to request the commissioner to exercise a discretion to disregard excess contributions or reallocate them to another year,” the ATO explained.
“When an amount of compensation is correctly payable to you but it is paid directly to your super fund, we will generally consider the payment to have been outside of your control if you have no control over whether the contribution is paid, when it is paid or who it is paid to. This may include Australian Financial Complaints Authority (AFCA) or regulator interventions that result in compensation being paid to your super fund.
“If the compensation is paid to you and you contribute it to your super fund, or you direct the financial service provider to pay the compensation to your super fund for your benefit, we would be unlikely to exercise the discretion on the basis of that circumstance alone as making the contribution would have been within your control.”
Other factors would also need to be present that, when considered together, would amount to special circumstances, according to the ATO.
If a compensation payment is a non-concessional contribution in a financial year, it may result in you triggering the bring forward of the non-concessional contributions cap.
“This will mean that you may not exceed the cap in the first year. If you subsequently make a contribution in the second or third years of the bring-forward period which results in you exceeding your cap, there would generally have to be special circumstances in relation to that contribution made in the later year for us to exercise the discretion,” the ATO explained.
“It will also be important to consider the compensation that you receive personally and then contribute to your super fund, or that you direct to be paid to your super fund, may have income tax consequences for you.
“If the compensation payment is a concessional contribution, there may be Division 293 tax consequences if your combined income and concessional contributions exceed the income threshold for the financial year you receive the contribution. From 1 July 2017, the threshold is $250,000.”
How to control your own destiny. (feather your own nest). Write your own rules that create more work for your department. No legislative basis. Just make it up and wait for it to be challenged. I fear we will never escape the idiocy permeating our industry.