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Contributed by mistake? Here are your options

Sep 5, 2019, 09:32 AM

By Graeme Colley

Graeme Colley SuperConcepts SMSF expert

Key points

  • Certain types of contributions are not permitted by law
  • In some instances, inadvertent contributions can be refunded 
  • Trustees are responsible for monitoring contributions and handling irregularities 

In what situation can and can’t an SMSF receive a contribution? And, if your SMSF has accepted an invalid contribution, can it be refunded?

Other than super contributions made by yourself, there are others who can contribute on behalf of a member including an employer, spouse and a parent for a child.

Whether a contribution can be accepted by the fund will depend on things like:

  • Your age
  • Whether you meet a work test if you are older than 65
  • The type of contribution involved
  • The amount you have in all superannuation funds, or
  • Whether you have provided your tax file number (TFN) to the fund

Refundable contributions

There are only two situations when a contribution can be refunded:

  1. When the Superannuation Industry (Supervision) Act and Regulations do not permit the fund to accept the contribution
  2. The return is authorised under the legal principle of ‘restitution for mistake’

Examples of contributions that should be refunded to the contributor include:

  • Mark is 75, does not work and has made a personal contribution to his SMSF
  • Sally is 66 and does not work but makes a personal contribution to her SMSF
  • Nick has not provided a TFN to his SMSF
  • Peta has made a spouse contribution for her husband who is 67 and does not work

Additionally, prior to 1 July 2017, a fund was not able to accept contributions in excess of a member’s contribution limit for non-concessional contributions which depended on their age. If the member was older than 65 the limit was $180,000, and if they were under 65 the limit was $540,000.

On the flipside, these contributions would not be refundable:

  • Tran has made a personal non-concessional contribution of $400,000
  • Makayla has a total superannuation balance of $1.8 million and has made non-concessional contributions of $200,000 to her SMSF
  • Frank is age 60, retired and has made non-concessional contributions of $200,000 to his SMSF

Contributions made by ‘legal mistake’

Contributions can be refunded if made by ‘legal mistake’. Here, it is more than the contributor regretting they’d made the contribution, or they had made an error in making the contribution. 

Legal mistake involves the receipt of the contribution when it was a payment intended for someone else, or the contributor thought they had a legal obligation to contribute which did not exist. 

An example of a legal mistake would be the situation where an amount has been paid to the superannuation fund but was intended to be paid as rent to a landlord. The payment was always intended to be paid as rent, but the super fund incorrectly received the payment.

A legal mistake or not? Judging the difference

As an example of a contribution not considered to be a legal mistake, the ATO have published Interpretative Decision ATO ID 2010/104.

This case involves a $1 million contribution made by an SMSF member. The fund claims it did not detect the error until it received its six-monthly bank statement. It then refunded part of the contribution so that the member would remain within their non-concessional contribution cap. 

The ATO considered that no legal mistake occurred justifying the refund, as the trustee should have recognised the issue at the time the contribution was made. They also considered that the amount refunded to the member should be repaid to the fund otherwise penalties could be imposed.

Responsibility rests with you

As a trustee of your SMSF, it is worthwhile putting in place some checks and balances to distinguish the contributions that should and shouldn’t be accepted. Trustees can be personally penalised for a breach or the fund could have its compliance status placed at risk.

If your SMSF has received contributions that should not have been accepted, or otherwise have been made in error as recognised under the law, you should refund the amount within 30 days after the error has been discovered.

Furthermore, the ATO says that contributions which are not permitted to be made should be refunded within 30 days of receipt. The reason is that you, as trustee, are responsible to check whether a contribution can be accepted on receipt.