Understanding the new framework for contributions
Most SMSF practitioners have a good working knowledge of the changes to the non-concessional contributions provisions, but what are the key strategies to tick off before 30 June?
Changes to the three-year bring forward rule
The 2016-2017 tax year represents the last chance to complete non-concessional contributions of $540,000 or if your client is between 65 and 74 years on 1 July 2016 and meet the work test, then $180,000.
This means if your client has triggered the three-year bring forward rule in 2015-16 or 2016-17, 30 June 2017 is the last day to use it all up, because on and from 1 July 2017, the non-concessional contribution limit will be $100,000 each year and not $180,000. This limit will be imposed on any unused non-concessional bring-forward balance remaining as at 1 July 2017, with the potential of significantly reducing the capacity of your client to use the former bring-forward provisions.
Consider reducing the client’s super balance
This sounds counter-intuitive but if your client is likely to have a total superannuation balance of approximately $1.6 million by 1 July 2017, ask whether they are able to draw on their super by way of a small benefit payment before 30 June 2017. If the member balance is just $1,599,000 as at 30 June 2017, a non-concessional contribution of $100,000 is available the next day.
And if your client’s super balance is likely to be around $1.4 million as at 1 July 2017, a small benefit payment prior to 30 June 2017 – if it were to reduce the member’s total superannuation balance to less than $1.4 million – would entitle your client to a non-concessional bring forward amount of $300,000 over three years.
Triggering the bring-forward provisions accidentally
This is easier than you think. John, 54, accepts your advice and decides to make a non-concessional contribution of $180,000 in the 2016-17 year. He wants to make full use of the new bring-forward provisions which apply on and from 1 July 2017 by making a non-concessional contribution of $300,000 on 1 July 2017.
John personally paid some SMSF expenses in the 2016-17 tax year. It was your accounting fees in fact. This is a deemed contribution to his SMSF (see TR 2010/1). It counts towards his non-concessional cap. While you realised it at the time, you were busy and you forgot to advise John to have the SMSF reimburse him in time.
John also personally paid for, without seeking reimbursement from his SMSF, some of the improvements to the real estate acquired by his SMSF in August 2016. Whoops! Another deemed contribution fee (TR 2010/1). The ATO, through its National Tax Liaison Group, has surmised that the contribution will generally be considered to be the increase in the assets’ market value caused by the improvement.
Let’s say that these unintentional non-concessional contributions total $25,000. This triggers the bring-forward provisions as John’s non-concessional contributions now total $205,000 ($180,000 + $25,000).
The application of the transitional provisions will mean that John will only be able to contribute an additional $175,000 ($100,000 + $100,000 - $25,000) and not the $300,000 as planned.
What does not count towards the non-concessional cap?
There are a number of payments that are excluded and they include:
(i) Contributions made by the government such as low-income superannuation contributions and co-contributions;
(ii) Contributions made where a deduction is sought but disallowed. This can occur for example, where your client does not provide a valid notice to the trustee of the fund of their intention to claim the deduction within time; and
(iii) Contributions made under section 292-95 (ITAA 97) if it arises from a compensation payment for a personal injury they have suffered.
Before the parade passes by
Small business clients who meet the applicable criteria will still be able to access the Division 152 small business CGT concessions and have them excluded from the non-concessional contributions cap.
Why not double check that their eligibility for such access continues to apply? You may not be sued for not suggesting it, but if you find something you can tweek to retain their eligibility, your client will love you forever.
Moreover, for those clients who just fall outside the eligibility criteria, a review of their ownership structure may be the way to have a B-class client become an A-class client. Assuming you are covering the tax issues pertinent to your client’s superannuation affairs, the review should be done with a commercial lawyer focused on asset protection and securities.
Many accountants and financial planners are unaware of the intricacies of the operation of our insolvency laws which, in certain cases, can mandate a change in certain business structures and this change can have the side effect of making the Division 152 concession available.
When the transfer from the foreign fund occurs after six months after your client becomes an Australian Tax Resident (ATR) – and let us assume that the foreign fund value at the time of becoming an ATR was $200,000 but that at the time of the transfer, it was $250,000 – your client has a choice as to whether the $50,000 will be taxed in their Australian fund or personally.
If they decide to have their fund pay the tax, a tax rate of 15 per cent will generally apply and the $200,000 will be assessed against the applicable non-concessional contributions cap.
Alternatively, the $50,000 can be taxed at the client’s marginal rate and the whole of the $250,000 will be applied towards the non-concessional contributions cap.
These choices need to be explained to your client because now that a lower annual cap is just around the corner – in circumstances where the marginal rates which apply to your client approximate the superannuation rate of 15 per cent – your client may want to have the fund pay the tax to minimise the use of the non-concessional contributions cap and give space for additional non-concessional contributions from elsewhere.
There are many ways to enhance your clients’ superannuation balances within the new framework. But a good understanding of the changes is essential to avoid a disgruntled client or worse still, a claim against you.
Leigh Adams, special counsel and accredited specialist in business law, Owen Hodge Lawyers