Recently, we came across a case where a member had sold their home and deposited the majority of the proceeds into their SMSF. This resulted in her exceeding her non-concessional contribution cap. To complicate the matter, she wanted the money returned urgently and did not want to wait until the ATO issued their release authority. In the end, we were able to find a solution that suited her.
She was the sole member of an SMSF and sold her home in September 2021. That same month, she deposited $1,000,000 into her fund. She was aged 62 at the time and was in accumulation mode. She wasn’t aware of her contribution caps and claimed that someone had advised her she could do this. From our records, we were able to confirm that we had discussed her NCC caps multiple times but, due to some health issues at the time, she had forgotten about those conversations. We became aware that this deposit was a contribution in January 2022. She wanted the money returned as quickly as possible.
LEAVE THE CONTRIBUTION IN THE SMSF
The ATO is very clear that this excess contribution could not be returned – Returning Contributions. As the contribution was made after 30 June 2017, the concept of fund-capped contributions was gone. This meant that the only way it could be returned was if the fund didn’t have her TFN recorded or she was too old to make the contribution, which was not the case.
We advised her that the correct thing to do would be to leave the money in the fund and wait for the release authority to be issued by the ATO. We would account for a NCC of $330,000, as she met the criteria, but $670,000 would be the excess amount. She would have to wait until the fund’s 2022 annual return was lodged for the ATO to make an assessment that the contribution was excessive. They would then issue the release authority for the excess amount and indicate what the tax on the associated earnings would be. In this scenario, it wouldn’t be reported as a breach of the rules however, it would take a while for all of this to happen. Unfortunately, she was not willing to wait so long to get the money out of her fund.
RETURN THE CONTRIBUTION
Another option was for the trustee to simply return the contribution however, to do so after 30 days would be a reportable breach, as the “restitution for a mistake” excuse would not be accepted. Treating the excess as a loan to the fund was another option however, as this would also be a reportable breach, it wasn’t considered.
She could also self-report in an attempt to get the ATO to issue the release authority earlier. Unfortunately, the chances of success were low but there was the possibility she could have access to the money earlier.
TRANSITION TO RETIREMENT
The final option we discussed with her, which she was happy with, was to commence a transition to retirement pension, so that she had access to some of her super immediately. She could then wait until her 2022 annual return was lodged and the release authority issued, before taking out the excess.
No doubt we’ve all had a similar experience, where a client receives “advice” and does something with their SMSF that leads to a serious breach. Even where there is regular communication between accountants, advisers and their clients, serious mistakes can still be made. When this occurs, it’s important to communicate with the client to understand why they want to take a certain approach and if they are willing to compromise, so that their needs can be met whilst keeping the SMSF compliant.
by Alex Polorotoff
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