A misunderstanding of the tax laws resulted in the tribunal effectively ordering the trustee to reclassify a $25,000 salary sacrifice contribution as a member contribution.
The member’s husband made a contribution via BPAY on 30 June 2011. When doing so, he nominated the incorrect biller code with the consequence that the trustee’s records showed the contribution as a salary sacrifice contribution not a member contribution. On 5 July 2011, a confirmation letter was sent advising the member that the money had been received and classified as a salary sacrifice contribution. The member acknowledged she had received this letter but she did not, at this time, realise the tax implications of what she was being told. She asserted she had always intended to claim a tax deduction for the contribution and further she actually had not earned any salary in the 2010/2011 financial year.
The member submitted she first became aware of the error when her tax agent forwarded her a letter from the ATO on 26 June 2012. The letter advised she had exceeded the concessional contributions cap for the 2010/2011 financial year and she would be taxed 31.5 per cent of any amount over the cap. This eventually led to her having a contribution tax liability of $7,875.
On 19 July 2012, the member asked the trustee to reclassify her contribution as a member contribution. The trustee refused to do so on the basis her tax return was completed for the year in question without her having lodged a Notice of Intent form to claim a tax deduction. The trustee further advised that it was unable to re-report the contribution to the ATO.
The tribunal found that there were two distinct issues to be considered. First, it had to be determined whether the contribution could be reclassified as a member contribution and, second, whether she could claim a tax deduction. The trustee had appeared to have conflated these two issues.
The tribunal found that the intent of the contribution was always clear. There was a genuine error made in using the BPAY salary sacrifice biller code and, therefore, it could be distinguished from a situation where a member’s circumstances changed after the contribution was made. The tribunal also held the trustee confused the deadline for members to lodge a Notice of Intent with the trustee for the purpose of claiming a tax deduction with the deadline for amending a Member Contributions Statement (MCS). The ATO’s website not only advises trustees to amend an MCS within 30 days of becoming aware of an error but also to amend any errors in an MCS no matter when the error is discovered.
Accordingly, there was nothing stopping the trustee from re-reporting the member’s contribution to the ATO with the consequence that the ATO would review its excess contributions assessment. On this basis, the tribunal substituted its own decision for that of the trustee and held that the member’s $25,000 contribution be reclassified to the ATO as a member contribution. On the issue of the member being able to claim a tax deduction, the tribunal held that as no form was lodged by the deadline, section 290-170 of the Income Tax Assessment Act 1997 meant the trustee had no discretion and could not accept a form after the legislated time. There was no remedy for the member on this point.
The trustee did not owe a duty to advise the member of the social security implications of a partial rollover of his Term Allocated Pension beyond the warnings it gave on the rollover form and the general information in the PDS.
In March 2011, the member requested a partial rollover of his Term Allocated Pension (TAP) to another fund. Part of the member’s investments in the fund were frozen and these frozen investments remained in the fund. The effect of the rollover was to invalidate the member’s 50 per cent Asset Test Exemption (ATE) from Centrelink with the result that he and his wife’s pension entitlements were significantly reduced. The member sought compensation from the trustee for the present value of the lost future Centrelink benefit, an amount of $143,715. The decision under review was the trustee’s refusal to pay this amount.
The member argued that the trustee had failed in its duty of care to advise him of the financial consequences to his social security position by partially rolling over his TAP to another fund. The trustee denied this assertion saying the ‘Withdrawal Instruction Form’ included a warning and recommended a review by a financial advisor to assess social security impacts. Here the request for the rollover had actually been completed by the member’s financial advisor and the member had also signed the form which included a statement to the effect that he did not require any further information and understood the implications of transferring benefits from his superannuation account. The trustee asserted that the member and his financial advisor were both put on notice to obtain advice from ‘bodies other than the trustee’.
Given these facts, the tribunal was satisfied that there were sufficient warnings to the member to obtain independent financial advice about the consequences of partially rolling over his TAP to another fund. The trustee had fulfilled its duty in the warnings it had given and so the tribunal affirmed the trustee’s decision to not pay the member compensation for the loss he had suffered.
The trustee’s failure to comply with its own switch rules did not result in it having to compensate the member beyond putting him in the position he would have been in had the trustee followed its own rules in the first place.
In October 2012, the member was in the fund’s default investment option and he completed a switch form to move to the cash investment option on 26 October 2012. As the form was received before the end of the month, the trustee’s own rules required it to action the request as at the end of the month. It did not do so and the member remained in the default investment option.
The member did not receive any confirmation about the switch but he, quite reasonably, assumed it had taken place. In January 2013, the member believing he was in the cash option, completed another switch transfer form to go back to the default investment option. He was allowed two switches a year under the fund rules so this was his second switch. The trustee did not action this switch in the way the member expected as it transferred his funds to the cash option.
Over the next few months, information flowed between the trustee and the member, and the trustee realised it had made a number of mistakes. The trustee adjusted the member’s account balance to reflect what it would have been if it had switched the member’s investments to cash effective 31 October 2012, and then subsequently switched the member’s investments back to default effective 30 January 2013. This is, of course, what the member originally wished to achieve.
However, the member sought to have his account adjusted to reflect his funds continuing to remain in the default option from October 2012 to the end of January 2013 and his January 2013 switch request cancelled. In other words, the member was effectively "selecting his investment options with the benefit of hindsight".
The tribunal accepted the trustee had acted fairly and reasonably in the circumstances and, consequently, it affirmed the trustee’s decision to not compensate the member in the way he wished. It noted that the member had not suffered any quantifiable loss as a result of the trustee’s initial delays in implementing his switch requests or his inability to have a third switch in the 2013 year.
This article was first published in Superfunds, 1 August 2016