Superannuation: exercise of the Commissioner’s discretion to disregard or re-allocate excess contributions

Since 2010, the Administrative Appeals Tribunal has been called upon in numerous cases to review the exercise by the Commissioner of the discretion in s 292-465 ITAA 1997 to disregard excess contributions or reallocate them to other income years. 

That the Commissioner’s decision has been upheld in the majority of cases indicates the narrowness of the mandatory considerations which govern the discretion.  The applicant must establish first, that there are special circumstances; and second, that it would be consistent with the object of Division 292 for the Commissioner to make the determination in their favour.  Showing ‘special circumstances’ requires the taxpayer to point to matters so exceptional that the ordinary rule (ie that contributions exceeding the statutory caps are taxed) should not apply.  The requirement that a determination be consistent with the object of Division 292 narrows the scope of the discretion even further.  The object of Division 292 is to ensure contributions are made gradually over a person’s life: 292-5.  By implication, the object involves the prevention or deterrence of sudden or excessive contributions.

The following is a discussion of some recent cases in respect of this discretionary power.

Thompson and Commissioner of Taxation [2014] AATA 339

The so-called ‘bring forward’ rule permits persons under 65 to contribute up to three times their applicable non-concessional contributions caps in ‘year one’: s 292-85(3) and (4).  In years two and three there is a commensurate reduction in their non-concessional contributions caps.

Thompson’s case is an example of a taxpayer triggering the ‘bring forward’ rule in one year and then failing to recognise the reduction in the caps applicable to them in the two subsequent years.  The objective foreseeability of excess contributions if the cap is exceeded in the two subsequent years makes it unlikely that the criteria for the exercise of the discretion will be satisfied.

Advisers should take care to check their clients have not already triggered the ‘bring forward’ rule before recommending a particular contribution strategy.

Commissioner of Taxation v Dowling [2014] FCA 252

This was an appeal by the Commissioner from a decision of the Administrative Appeals Tribunal.  The case concerned the ‘bring forward’ rule and the effect of two substantial contributions, made in different years.

In the 2009 year, following advice from Centrelink and another adviser, and with the apparent purpose of Mr Dowling gaining an entitlement to an age pension, Mr Dowling withdrew the entire balance from his superannuation account – approximately $293,000 – and contributed most of that amount to Mrs Dowling’s superannuation account in the same fund.  This triggered the operation of the ‘bring forward’ rule in respect of Mrs Dowling.  It affected her contributions caps for the two subsequent years.

In the 2011 year, Mrs Dowling implemented a strategy of withdrawing approximately $241,000 from her superannuation account and re-contributing $200,000 of that sum as a non-concessional contribution.  She did not seek professional advice in respect of this strategy but relied upon media reports about its benefits in respect of succession planning.

As to what was meant by ‘special circumstances’, the Tribunal found it suggested circumstances resulting in an outcome that is ‘unreasonable, unjust or inappropriate’, and which take events outside of the ‘usual or ordinary case’: [49].  It found Mrs Dowling had demonstrated special circumstances in respect of the first contribution because:

  • Mr and Mrs Dowling had altered their position following advice from the Centrelink and a financial adviser associated with their superannuation fund: [51];
  • they would not otherwise have made the 2009 year contributions: [52];
  • Mrs Dowling had been affected but had not primarily acted to advance her own position: [53];
  • Mr and Mrs Dowling had obtained advice in respect of the first contribution and had diligently sought to verify Centrelink’s advice: [55];
  • the two transactions did not involve contributing any ‘new money’ to the couple’s superannuation accounts, but merely a re-arrangement of their existing funds: [61];
  • being retirees, as distinct from employed persons, they should not be taken to have ‘day to day insight’ about the operation of Division 292, and they had limited wealth in the context of a superannuation system designed to encourage individuals to provide for their own retirement: [62].

It found that there were no special circumstances in respect of the second contribution.

However the Tribunal determined to exercise the power to disregard a ‘notional excess contribution’ in respect of the first contribution for the purposes of excess contributions tax: [70].  The consequence of its analysis was to relieve the taxpayer from her excess contribution tax liability for the second contribution; [92].

The Court found this was a wrong approach.  The discretion to disregard or reallocate contributions was to be exercised for a particular financial year: [93].  Due to the operation of the ‘bring forward’ rule, it was the second contribution that had triggered a liability to excess contributions tax: [95].  The real question for the Tribunal was to consider whether the circumstances attending the second contribution were such as to authorise an exercise of the discretion in respect of that year.  Those circumstances might include the circumstances of the first contribution.  However, the power conferred by s 292-465 to disregard or reallocate contributions, did not authorise the alteration of a person’s excess contributions in one year (in this case, the first year) based on a consideration of the circumstances attending contributions for a different year; [98].

There was a second error in the Tribunal’s approach in that the matters relied upon as constituting ‘special circumstances’ were merely the implementation of an arrangement to gain entitlement for Mr Dowling to the age pension which was prudential or sensible from the perspective of the Dowlings’ circumstances; [104].  Further, the facts that there were no ‘new’ contributions and that they made arrangements conditioned and informed by their own particular domestic circumstances did not constitute ‘special circumstances’: [108].

There was a third error in the Tribunal’s approach to the question whether to exercise the discretion would be consistent with the objects of Division 292.  The contribution of a lump sum from Mr Dowling’s superannuation account to the account of Mrs Dowling did not satisfy the object of Mrs Dowling’s superannuation benefits representing contributions made gradually over her lifetime: [115].

The statutory question whether excess contributions were ‘reasonably foreseeable’ needed to be answered at the time of the relevant contributions.  It was ‘perfectly obvious’ that the second contribution would give rise to excess contributions once the ‘bring forward’ rule was triggered: [123].  The question whether special circumstances attended the second contribution was informed by the circumstances of the first contribution in the sense that the first contribution had the effect of fixing the excess contributions cap for the second year (by operation of the ‘bring forward’ rule): [124].

The appeal was allowed and the case remitted to the Tribunal to be reheard and determined according to law.