SMSF Technical Education & Strategies

Can you circumvent excess contributions tax via a trust?

By Denis Barlin
Director - SBN Lawyers
30 March 2010

On 29 March 2010 the Deputy Commissioner of Taxation (‘DC of T’) issued Taxpayer Alert 2010/2 entitled Circumvention of Excess Contributions Tax (‘the Alert’).  The Alert deals with provisions in self managed superannuation fund (‘SMSF’) deeds which attempt to circumvent the charging of excess contributions tax. 

What is Excess Contributions Tax?

From 1 July 2007 the concessional taxation of superannuation benefits has been limited by restricting the amount that may be contributed with respect to a member in a particular income tax year.  There are two types of contributions, and two types of ‘caps’ referable to such contributions, being:

- a concessional contribution cap of $25,000 per annum (or $50,000 per annum if the member is aged 50 or over for the transition period ending 30 June 2012); and

- a non-concessional contribution cap of $150,000 per annum (individuals aged under 65 may bring forward two years worth of non-concessional contributions, being an amount of $450,00 that can be contributed in one year, with no more contributions being permitted for the next two years).

What arrangement concerns the DC of T?

The Alert describes arrangements whereby provisions are inserted in an SMSF deed so as to attempt to circumvent the imposition of excess contributions tax.  The provisions intend to create separate trust, which ostensibly exclude from the SMSF any contributions that may cause a member to exceed their concessional or non-concessional contributions caps.

The clauses cause the excess contributions to be held on a separate trust to that of the SMSF, which are repayable to the relevant member.  Such provisions may be required, as under general superannuation law, amounts contributed to a superannuation fund cannot be returned to a member unless a condition of release is satisfied.

What does the DC of T think about such provisions?

The DC of T is concerned with whether such arrangements do in fact create separate trust relationships (in relation to the excess amounts) and may in fact avoid excess contributions tax.  The problems, according to the Commissioner, include that:

- the general anti-avoidance provisions (1) may apply;

- any entity involved in the arrangement may be a tax scheme promoter (2) and be subject to penalties;

- the return of the excess amounts to the member is contrary to the spirit of the superannuation regime; and

- the intermingling of the excess amounts and the other assets of the SMSF may have implications for the sole purpose test.

The DC of T that they “… have reviewed these arrangements and consider that they are ineffective.  Any excess amounts are contributions for the purposes of both the … ” superannuation legislation and the income tax legislation.