In order to ensure that superannuation balances are kept for genuine retirement, superannuation law requires that a person meet a “condition of release” before they are paid a benefit from a super fund. The most common conditions of release are retirement from employment or reaching the age of 65 (N.B. reaching age 60 is not a condition of release). When benefits are paid in accordance with these restrictions they are generally taxed at concessional rates. In particular, most super benefits paid from taxed super funds (including SMSFs) are tax free once the member reaches the age of 60.
If a super benefit is paid out in breach of these restrictions, the amount of the benefit is generally taxed at the recipient’s marginal rates. This is an integrity measure intended to create a disincentive for withdrawing super benefits in breach of the law. However, the Commissioner of Taxation has a discretion to allow concessional treatment of the super benefit. This may occur to the extent that he is satisfied that it would be unreasonable to tax the benefit at full marginal rates, considering the nature of the super fund and any other relevant matters.
The ATO has released Draft Practice Statement Law Administration PS LA 2021/D3 which outlines how and when the ATO will exercise this discretion where a member of a super fund receives super benefits in breach of legislative requirements. The draft PSLA states that the discretion should generally be exercised where there are no tax avoidance implications, and the excessive benefit arose fortuitously or in other circumstances beyond the effective control of the recipient or the employer (if an employer is involved).
In particular, the PSLA considers the nature of SMSFs, in which all members are generally required to be trustees or directors of a corporate trustee, and so could usually be expected to be actively involved in the management of the fund. In contrast, a member of an APRA controlled fund (such as an industry or retail fund) is unlikely to have effective control over the management of the fund or the payment of benefits. Consequently, the ATO is less likely to exercise this discretion in the case of an excess benefit paid by an SMSF. The member of an SMSF would have to establish that the benefit arose in circumstances that were genuinely out of their effective control. The example cited in the PSLA is an error by the fund’s bank which results in the payment of an excess benefit.
The PSLA also states that these factors do not support an application for the discretion:
- The member suffering financial hardship
- Attempted rectification of the transaction
- The taxation consequences are difficult for the person to meet
- Events that occur after the super benefit has been received
Breaches of the super rules can also potentially expose trustees to administrative penalties, possible disqualification as trustees, and the super fund being made non-complying.
This is a timely reminder that the payment of excess benefits can have serious consequences. Please contact your Nexia advisor if you have any questions in relation to the payment of super benefits.
