PORTFOLIO POINT: A recent decision by the Tax Office will ensure SMSF trustees, in certain situations, can spread their super contributions over two years.
The power of super as a retirement vehicle has a number of limitations. For a start, there are plenty of brakes stopping you getting money into your fund.
Importantly, however, there are a few boundaries that are allowed to be pushed a little further for those who have a self-managed super fund.
One of the most important of those is being able to manage your contributions. Outside of superannuation guarantee contributions paid by an employer, an SMSF has far greater flexibility in being able to time contributions (and therefore the ensuing investments).
For instance, would you like a tax deduction, up front, for the contribution of two years’ worth of your own contributions if that suited you or your business, or your tax situation?
A recent interpretive decision from the Tax Office has given certainty to those wanting to make the most of deductions for contributions in the current year, but to have those contributions made over two years.
Until now, SMSF professionals had to rely on notes from a working group committee, produced about three years ago.
But the ATO this month put out an Interpretive Decision (ATO ID 2012/16) that gives certainty – in defined situations – to those wanting to make contributions in one year, but have them spread as contributions over two years.
How was this ATOID applied?
The example used by the Tax Office in its ATOID was, roughly, as follows.
A member made a personal contribution of $25,000 in April 2011. It was immediately allocated to the member’s SMSF account. A second personal contribution of $25,000 was made on June 28, 2011. On July 4, 2012, the trustees allocated that second $25,000 to the same member’s account.
In essence, the employer had made a contribution of $50,000, but from the member’s perspective, the contributions were made over two financial years.
The ATO found that the parties had satisfied all of the conditions necessary to make the contributions and the multi-year allocation was allowed.
How is this possible? Well, the trustees have up until 28 days after the end of the month in which the contribution was made in order to allocate it to a member’s account.
In this case, the end of the month for the second contribution was June 30, 2011. Therefore, the trustees had until July 28, 2012, to allocate the second $25,000 to the member’s account.
The ATOID was careful to point out that the allocation of the second contribution needed to comply “with the governing rules of the fund”. That means the SMSFs trust deed needed to allow for the contribution to be made in this manner.
How this ATOID can be used by SMSF trustees
There are several strategies, employed in the past, which now have far more certainty.
1. The ability to put in concessional contributions that cover two years (the current year and the following year).
2. Reducing considerable capital gains via the use of concessional contributions to reduce taxable income.
3. Putting in large non-concessional contributions, such as commercial properties, over two years.
4. Managing income tax. This strategy is particularly employable to reduce income tax in one year, if the following year is likely to see lower total income.
5. This is potentially another way of also dealing with excess contributions (see Common sense prevails on caps, May 5 2011).
Timing of the contributions becomes EXTREMELY important. Do not attempt this strategy without help from a qualified financial adviser.
The tax benefits outside of super
The concessional contributions themselves can have several benefits for the individuals outside of super.
First, when it comes to concessional contributions, the business can make the contribution of $50,000 and claim the tax deduction for the contribution, thereby reducing taxable income for the business by $50,000 for the year in question.
If an individual, who is able to make a contribution, has a considerable capital gain, the contribution could also be used to reduce the taxable income for the year, reducing the effective tax paid on that gain.
Warning for those over 50
There are some complexities here for those who are over 50 and able to contribute to super.
Given that June 30, 2012, is the final year of $50,000 contributions (for some over-50s), it’s important to note that this won’t allow you to get two lots of $50,000 into your super fund.
The rules currently state that those over age 50 are able to make concessional contributions of $50,000 in regards to the current financial year (FY11-12).
However, this drops to $25,000 from July 1, 2012, unless you qualify to make higher contributions under the 50-50-500 rule (see Please explain, Mr Rudd, May 19 2010). At the time of writing this column, the government has reiterated its commitment to the implementation of this rule, but still has not released details of how it’s going to work on a technical level. It is understood the rules are going to be in place by June 30.
So, if you are over 50 and able to contribute this year, you are able to make total concessional contributions of $50,000 for this year. However, unless you qualify under the 50-50-500 rule, you should only anticipate that you will be able to make a contribution of $25,000 for the next financial year.
This could lead to a few scenarios for the over-50s who are eligible to implement this strategy.
1. Those with less than $500,000 in super should be able to put in $50,000 for this year and $50,000 for next year.
2. Those over 50 with more than $500,000 in super could still put in $50,000 for this year and potentially $25,000 for next year.
Contributing commercial property
It is the use of this law that, potentially, allows a two-member fund to contribute business real property worth up to $1.2 million into an SMSF at one time, using the non-concessional contribution limits.
Non-concessional contribution limits, for those eligible to contribute, are $150,000 each year, with the ability to “pull forward” up to three years’ worth on contributions at once.
Let’s take a commercial property worth $1.1 million with a two-member, husband-and-wife fund. The property is currently held in their own names.
The contribution of the property could be made in June. Immediately, the trustees allocated $150,000 to each member (total $300,000), reducing the excess contribution from $1.1 million to $800,000.
Assuming the two members are eligible to make non-concessional contributions the following year, the trustees could use the pull forward rules to allocate $400,000 to each member’s fund. This would fit under the $450,000 pull-forward rules.
This allows total contributions of $1.1 million over two financial years, by using the pull-forward rules. That essentially means the contributions are being made in respect of four financial years (the current year and the following three years).
Don’t forget that contribution limits are per person. For many who run their own businesses, these limits can be used for both husband and wife (and potentially for other members of the fund also).
For more on the benefits that can be potentially used in SMSFs by couples, see Team Super (January 25 2012).
Tax on contributions
The ATOID says that, as the contributions were made to the fund in the one financial year, that is the year in which they will be taxed.
That is, if $50,000 is contributed in respect of two financial years, it will be received as income by the fund in the one financial year. Therefore, even though the fund is not allocating them until two different years, they will be taxed as income to the fund in the same financial year.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser, as some of the strategies used in these columns are highly complex and require high-level technical compliance.