Navigating arising traps unravelling SMSF contribution plans
SMSFs have been flagged on navigating different traps that can unknowingly unravel planned contribution strategies when facing regulation, with additional care needed to avoid tax impacts on the fund, according to a technical specialist.
Heffron head of education and technical services Lyn Formica said that whilst Australia’s retirement income system includes significant tax concessions for superannuation, the rules are complex and too often contribution strategies unravel with additional taxes imposed on the fund.
She noted that one of the fundamental rules when working with those new to super is to check eligibility to contribute before exploring the tax concessions which might be available.
For example, a contribution strategy purporting to save a 68-year-old client thousands in tax will come to naught if they don’t meet a work test and aren’t eligible to contribute to super.
SMSFs also should make sure that employers can only claim tax deductions for super contributions for employees.
“This means an individual needs to either be an employee for common law purposes or a deemed employee under the superannuation guarantee rules,” she said in the Heffron blog.
“Problem areas I commonly see include non-executive directors who aren’t entitled to payment under the company’s constitution, trust deeds which don’t allow for the individual trustees or directors of the corporate trustee to be employed by the trust, and; individual trustees or directors of a corporate trustee who aren’t engaged in producing the income of the trust or its business.”
Funds should also be on alert for things that might not look like contributions but are.
“We are all familiar with clients making super contributions by transferring monies into the fund’s bank account, or if you’ve been around long enough, giving the fund trustee an old-fashioned cheque. Some of us will also have seen clients transfer assets into the fund’s name as an in- specie contribution,” she noted.
“However, there are a number of other transactions which may also be considered contributions. For example, where a fund’s expenses are paid by the members or other entities and not reimbursed by the fund (even if they aren’t recorded in the fund’s accounts as a contribution).”
It is also important for SMSFs to note the timing of contribution as too commonly, clients inadvertently exceed a contribution cap or do not get the tax deduction they thought they would because contributions are made in the wrong year, according to Ms Formica.
Contributions aren’t eligible to be claimed as a tax deduction until they are “received” by the fund.
“In the case of electronic fund transfers or contributions via a clearing house, this is generally not until the money is credited to the fund’s bank account which can be many days after the monies left the contributor’s account,” she said.
“ The ATO has however provided some concessions here where contributions are made via the Small Business Super Clearing House (refer to our earlier blog).
“The issue is further complicated for SMSFs because a contribution doesn’t count for cap purposes until the contribution is both received and allocated to the member’s account.”
Double-checking non-deductibles, TSB and member allocations
When making contributions it is also important to not assume non-deductible contributions will always be non-concessional contributions. Ms Formica observed that whether a contribution is regarded as a concessional or non-concessional contribution for cap purposes depends on whether or not the contribution is included in the fund’s assessable income.
“By default, contributions made by someone other than the member (e.g. the member’s family trust) (but excluding spouse contributions) will be included in the fund’s assessable income and counted towards the concessional contributions cap even if they are not tax-deductible to the entity that made the contribution. Clients looking to achieve a different result would be wise to seek specialist advice,” she said.
Meanwhile, since 1 July 2017, a number of super measures are dependent on the member’s total super balance (TSB) at the previous 30 June, for example, their non-concessional contributions cap, their eligibility to use carried forward concessional contributions cap space.
“The ATO has previously recognised that this value will not necessarily be the same as the amount shown in an SMSF’s annual financial statements. Rather, there are a number of costs that could reasonably be taken into account for the specific purpose of determining an appropriate TSB value. For example, the costs of disposing of fund assets and the tax on any unrealised capital gains,” Ms Formica explained.
“If it appears likely a client will exceed a relevant TSB threshold by a small amount, it may be worth reviewing their TSB calculation and reporting a revised amount in the SMSF Annual Return at the special labels X1 and X2. Ideally, these adjustments are made prior to lodgement of the SMSF Annual Return rather than after an excess contributions determination has been issued.”
Ms Formica also stressed the importance of double-checking member allocations before lodging returns.
“One of the other scenarios in which I am often called on for a second opinion is where a client has received an excess contributions determination and they now want their tax agent to change the allocation of that year’s contributions amongst the members,” she explained.
“This can cause quite an ethical dilemma where the information on the tax agent’s files does not support an error in the member allocations but rather a moment of regret on the client’s behalf.”
Tony Zhang is a Journalist at SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2020, Tony has covered various publications across the legal, financial and professional services sectors including Lawyers Weekly, Adviser Innovation, ifa and Accountants Daily.