Is a financial services compensation payment to your superannuation fund a contribution?
Of late, there have been several compensation payments made by financial services providers to customers that were inappropriately charged or overcharged for insurance premiums or services they did not receive, etc.
The tax treatment of the compensation depends on what the compensation is being paid for and how you hold (or held) the investments.
Your compensation payment can include some or all of:
- compensation for loss on an investment
- refund or reimbursement of adviser fees
- interest component
Generally, there is information from the ATO about how these individual compensation payments are taxed.
Now, new guidance from the ATO helps decipher whether these compensation payments are treated as contributions to your fund.
The problem for some people is that where these compensation payments are treated as a contribution to their superannuation fund, they may exceed their contribution cap or attract Division 293 tax (a 15% tax on super contributions imposed on those with combined income and super contributions of $250,000 or more).
In general, the treatment of the compensation depends on who engaged the financial services provider.
- The Super fund engaged the financial services provider and compensation was paid to the fund – compensation not treated as a contribution.
- An individual engaged the financial services provider and compensation paid to the fund but not at member’s discretion – compensation is a concessional contribution in the financial year it is received.
- An individual engaged the financial services provider and compensation paid to the fund at the member’s discretion – compensation is a non-concessional contribution in the financial year it is received
Where neither the member of the fund or the financial services provider had a right to seek compensation, the amount will be a concessional contribution in the financial year it is received by the fund.
If you have received a compensation payment from a financial services provider and the payment means you have exceeded your contribution cap, or are liable for Division 293 tax, there is a potential solution to avoid an adverse impact where you did not have control over the payment. In these cases, you can apply to the Tax Commissioner to exercise his discretion to disregard excess contributions or reallocate them to another year.
Speak to your financial advisor to confirm your specific situation.