Superannuation Q&A

This week:

• Employer super payments.
• Reserve accounts.
• Foreign exchange and CFD investing in SMSFs.
• Using an SMSF to buy US property.

Employer super payments

What are the tax implications of this situation? I sacrificed 100% of my salary for the last few months of the financial year to try to get up to the $25,000 limit. This is fine on my group certificate, but unfortunately the money has yet to actually hit my super account as the employer only makes the super payment every couple of months. Does this mean the money going into the SMSF will count towards the next (2011-12) financial year’s $25,000 or will it be counted (as intended) in the 2010-11 financial year? It seems a bit unfair if my employer hasn't put the money into my account in time.

Concessional contributions are recorded in the financial year in which your super fund physically receives payment, not the period in which the liability arose for the purposes of your $25,000 annual limit.

Legally, your employer is only required to make superannuation payments by the 28th day following the end of each quarter. As such, you do need to take your employer’s internal payroll policy into account when planning your annual concessional contributions. Failure to ensure you remain within your concessional contribution limit will result in a penalty excess contributions tax of 31.5%.

Using reserve accounts

Why bother with a reserve account to manage non-concessional contributions? Why not just make a $150,000 contribution in June, triggering the bring-forward rule, and follow it up with a $450,000 contribution in July? Aren’t the tax savings effectively the same as well?

Super funds are required to record contributions as of the date of the member’s contribution. The rules governing contribution reserve accounts are designed to provide larger multiple member funds with administrative relief in the process of allocating member contributions. Specifically, SIS Reg 7.08(2) allows trustees up to 28 days after the end of the month in which the contribution was made to allocate contributions to members’ accounts. While this aims to assist larger funds manage their administrative burden, it also applies to smaller funds such as SMSFs.

Contribution reserves cannot be used to alter excess contributions and therefore should not be viewed as a substitute for proactive management as a way to manage individual contributions cap. Therefore, the use of a contribution reserve will provide no tax benefit over a directly allocated contribution.

Rules governing reserve accounts are complex and require specialist advice as incorrect use of reserves can lead to inadvertent breaches of contribution limits so trustees should always ensure they seek professional advice on the matter.

SMSF investments in CFDs, forex

Can I invest in foreign exchange and contracts for difference via my SMSF?

The SIS Act does not specifically prohibit SMSF trustees from investing in CFDs (contracts for difference) or foreign currency provided the investment is in line with the fund’s recorded investment strategy and the use of derivatives is permissible under the fund’s trust deed.

Caution should be applied before entering into a CFD position as not all forms of derivatives are permitted. Trustees should ensure they do not enter into any collateral agreement to the CFD that places a charge over any asset off the fund as this is strictly prohibited (SIS Reg 13.14). Moreover, trustees should not be investing in CFDs for “speculative” purposes as derivatives can generally only be used for hedging purposes.

CFD providers typically do not have SMSF requirements in mind when designing products so close scrutiny of the product disclosure statement is highly advisable as is seeking professional assistance in this highly specialised area.

Using an SMSF to buy US property

If I were to buy a US residential property with my SMSF, are there any special tax or regulatory issues that I should be aware of?

Provided the US residential property satisfies the usual conditions of being in line with the fund’s investment strategy and meeting the sole purpose test, it can be purchased through an SMSF. However, the purchase raises a host of taxation and practical issues.
If the jurisdiction in which the property is purchased allows foreign ownership, the trustee will need to lodge a US income tax return for every year in which the investment is held. While Australia and the US maintain a double taxation agreement, certain taxes arising in the US, such as capital gains, do not necessarily receive an automatic offset against applicable Australian tax. The US tax regime is complicated and requires specialist local tax advice, which can be expensive. Similarly, the US title system is complicated and specific taxes can vary from state to state. This too will require specialist advice.

Owning a foreign property will also naturally lead to increased auditing costs. SMSFs owning overseas investments are likely to have a more difficult time satisfying auditor requirements each year.

For example, certain US states require foreign entities to establish a local company with local bank accounts, which owns the property, and in turn the SMSF owns the shares of the company. This in itself may give rise to related party issues where the SMSF trustee owns shares in the company.

Accordingly, you will need to do your homework first and understand the rules that are specific to the US state in which the property is located before the SMSF commits itself.

Nerida Cole is the head of Dixon Advisory’s financial advisory division.