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Impact of compensation on super caps
Article published on: 18-08-2022
Clients may receive compensation from a financial service provider for inappropriate financial advice or where fees were paid but no advice was provided. The ATO’s Fact Sheet ‘Super contribution caps’ provides guidance on the impact on your client’s concessional contribution (CC) and/or non-concessional contribution (NCC) caps where an amount of compensation is received by their super fund.
How compensation paid into super impacts your client’s contribution cap will depend on the circumstances such as where:
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the client’s super fund engaged the financial service provider and has a right to compensation
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the client personally engaged the financial service provider and has a right to compensation, and
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there is no right to compensation.
Super fund engages financial service provider and client has right to compensation
A trustee of a super fund may be entitled to claim back an adviser service fee from the financial service provider if the member did not receive the agreed service. A super fund will ordinarily have a right to seek compensation when it was the same trustee that paid the expense. In this case, if the expense (including any interest that may have been calculated on the paid fee) is refunded and allocated back to the member’s account, it will not count towards any contribution caps. The ATO also provides general guidance on the tax implications to the fund on their page ‘fees where no service is provided’ under these circumstances.
Client personally engages financial service provider and has right to compensation
Where the client (themselves and not the super fund) has a right to seek compensation because they personally engaged the financial service provider and the compensation is paid directly by the financial service provider to the client’s super fund, the amount will be treated as a contribution to the fund. If the amount paid directly into the fund was not at the direction of the client, then the contribution will be treated as a CC in the year it is received by the fund. If the amount was paid into the client’s super fund at the client’s direction, then it will be treated as an NCC. This contribution will count towards the cap in the year it is received. If the client receives the compensation personally and contributes the amount to super, then the contribution will also be treated as an NCC. However, if the client submits a valid notice of intent to claim a deduction, that portion of the contribution will be treated as a CC. The ATO also provides general guidance on the tax implications to clients on their page ’Compensation paid from financial institutions’.
Where there is no right to compensation
Where neither the client themselves or the trustee of the super fund has a right to seek compensation and an amount is paid to the client’s super fund, the amount will be counted as a CC in the financial year it is received by the fund. Please see the ATO’s Fact Sheet ‘Super contribution caps’ for more information on the impact your client’s CC and/or NCC caps where an amount of compensation is received by their fund. | |
