Bornstein v Commissioner of Taxation [2012] AATA 424 represents a rare instance of a taxpayer being successful in an excess contributions tax matter in the Administrative Appeals Tribunal (AAT).
Looking for an 'exception to the rule', the AAT appeared to acknowledge the difficulty faced by taxpayers in these matters. Accordingly, dismantling the 'perfect storm' in Bornstein gives new and valuable insights into when the Commissioner's discretion to disregard contributions is likely to be exercised.
The facts in brief
The taxpayer (Bornstein) was the sole director and shareholder of a company, and was also employed by it. Over a number of financial years, the company had been making contributions to the taxpayer's superannuation fund, with this happening toward the end of each financial year.
The taxpayer was overseas between 21 June and 8 July 2007. When he contacted his accountant to check whether a superannuation contribution had to occur before the end of the financial year, he was given the impression he had a period of grace in which to make the payment, which would then be backdated to the 2006-07 financial year.
The taxpayer paid an amount into his superannuation fund on 10 July 2007. The taxpayer's evidence was that he consulted the Australian Taxation Office (ATO) website, which advised an employer could make super contributions in respect of an employee up until 28 July.
That page of the website did not refer to consequences for the employee in this regard. The taxpayer gave evidence that he assumed he was able to make the superannuation contributions in this way without anyone suffering adverse consequences.
The taxpayer became liable to pay excess contributions tax. The Commissioner refused to exercise the discretion to reallocate the contribution under s 292-465 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997).
The taxpayer's objection that followed was unsuccessful. Review by the AAT was then sought. We now consider the critical issues in excess contributions matters, in light of the outcome in Bornstein.
When is a contribution 'made'?
The timing of a contribution will be a preliminary issue. In Bornstein, no argument was made that the contribution was actually made in the earlier financial year. Further, other decisions make it very clear that contributions are generally 'made' when they are received by the superannuation fund's account.
This was the approach taken in Peaker v Commissioner of Taxation [2012] AATA 140, Chantrell v Commissioner of Taxation [2012] AATA 179 and Rawson v Commissioner of Taxation [2012] AATA 322. These decisions show the difficulties of mounting an argument based on electronic funds transfers or BPAY transfers very late in the financial year, where the money has been received by the fund in the new financial year.
What will constitute 'special circumstances'?
The exercise of the discretion to disregard or reallocate contributions requires 'special circumstances'. Tran v Commissioner of Taxation [2012] AATA 123 states that an "innocent mistake or ignorance of the law does not, in itself, constitute special circumstances".
Bornstein reiterated that "circumstances are not special if they are common-place or usual". So what was considered different in the case? The following items were, together, held to constitute special circumstances:
· The taxpayer took advice from his accountant. It was relevant that he was conscious that he had obligations and was being "diligent in attempting to comply with them";
· There was apparent ambiguity on the ATO website (there was no requirement, however, that the ATO had to be 'at fault');
· The Commissioner did not alert him to the true position before the further payment that breached the limit was made. Also, the behaviour of the taxpayer's superannuation fund did not give him any reason to question what he had done.
The take-home point is that where a good faith mistake is made due to bad advice or ambiguity, the discretion is more likely – although by no means guaranteed – to be granted.
Compare this to the 'late payment' cases mentioned above, where the person contributing either simply made the 'mistake' of paying too late, or worse (as discussed in some decisions), effectively 'took a gamble' on whether electronic funds or BPAY transfers would take place on time.
The taxpayer will almost certainly be unsuccessful in these scenarios.
Consistency with the object of the legislation – intention of contributor is relevant
Another element that must be made out is that the determination to disregard or reallocate a contribution can only be made if this would be consistent with the object of Div 292 of the ITAA 1997.
The stated object is, broadly, to ensure that concessionally taxed superannuation benefits result from contributions made gradually over one's life. Bornstein reveals a critical point here, in that the taxpayer's intention was actually relevant to the question of consistency with the objection of the legislation.
In the facts, the taxpayer had been contributing gradually over a number of years and intended to do so again. Reallocating the contribution was therefore held to be consistent with the legislation's object. The point to remember is: it is in the taxpayer's favour if they have merely been trying to contribute gradually, and this has been the norm over a number of years.
This is in contrast to 'special circumstances', where intention is generally not relevant. This was the case in Chantrell, where the contribution actually fell in a later year, despite the taxpayer's intention to contribute in the earlier year.
Reasonable foreseeability, appropriateness and "any other relevant matters"
The Commissioner may have regard to whether it was reasonably foreseeable when the contribution was made that excess contributions tax would arise.
In Bornstein, it was conceded that "on one level, the [tax] was indeed foreseeable: if the taxpayer had properly understood his obligations, he would have anticipated the problem". However, this appeared to have been given little or no weight, as the taxpayer was, nonetheless, successful.
The Commissioner may also have regard to whether a contribution would "more appropriately be allocated towards another financial year".
In Bornstein, this seemed to be satisfied easily due to "consistency with the object of the legislation" and "special circumstances" being made out. Senior member McCabe stated while the taxpayer had "failed to comply with the letter of the rules, he [had] clearly complied with their spirit".
It should also be noted that the category of things that can be considered in these cases is not closed. Section 295-465 provides that the Commissioner can have to regard to "any other relevant matters". It remains to be seen what further matters will be deemed relevant in future.
Declaring a trust – a possible workaround
The above leads one to consider other possible options when trying to make a contribution at the last minute. BPAY or electronic funds transfer payments have proven themselves an unwise choice.
The ATO has recognised in TR 2010/1 that an 'in specie' contribution to a superannuation provider can take place when beneficial ownership of the asset is acquired by the provider, and that beneficial ownership can be acquired earlier than legal ownership.
One could argue the same should apply in respect of money. If so, a member may at the last minute declare that they hold money on 'bare trust' for a superannuation fund.
It should be noted that the above is novel, and accordingly, is not recommended. Additionally, the ATO's comments were in the context of in specie contributions, not cash.
Other legal problems may also arise. In any case, for those desperate to contribute, one should at the very least seek legal advice, as well as ensure evidence exists to identify when a bare trust came into existence.
Conclusion
The task of extraction from an excess contributions tax scenario is more like braving a stormy sea than a walk in the park. However, the successful outcome in Bornstein has allowed us to make comparisons to failed attempts in order to better understand when the discretion to disregard or reallocate might be exercised.
David Oon is a consultant and Bryce Figot is a senior associate at DBA Lawyers.
