Contribution Limits & SMSFs

posted on March 9th, 2011 by Bellmont Research Team

It has been announced that contributions to SMSFs reduced by 50% last year. One of the reasons for such a large decline in contributions has been identified as the caps on contributions imposed by the ATO.

There are currently 2 types of contributions; non-concessional and concessional.
Non-concessional contributions are generally made to a super fund by or for you in a financial year and are not included in the super fund’s assessable income (for example personal contributions you make from your after-tax income). The current non-concessional contribution cap is $150,000 per year. If you are under 65 years old at any time during the financial year, you may be able to bring forward the next two years of contributions, but certain conditions apply. This effectively allows you to contribute up to three times the cap at once or at any time during the three financial years. There is a tax of 46.5% on contributions made in excess of the cap.

Concessional contributions are generally made to a super fund for or by you in a financial year and are included in the assessable income of the super fund (for example super guarantee, salary sacrificed amounts and any amount you are allowed as a personal super deduction in your income tax return). The current concessional contribution cap is $25,000 per year. This cap will be indexed annually from 2010-11 onwards to average weekly ordinary time earnings (AWOTE) and rounded down to the nearest multiple of $5,000.There is a tax of 31.5% (in addition to the 15% paid by the super fund).

Currently, there is a transitional concessional cap for those who are 50 years old or older on 30 June in a financial year and is available until 30 June 2012 and is not indexed. This cap is $50,000. Any excess of the caps on these contributions will count towards the non-concessional contributions cap.

Clearly the more amount in a member’s superannuation account the more the member will be able to access upon retirement. From July 2012 Treasurer Wayne Swan proposes to lower the contributions limit to $25,000 for all savers, unless they are over the age of 50 and have less than $500,000 in their accounts.

The Self Managed Superannuation Fund Professionals’ Association (SPAA) has made submissions to the government to have the superannuation contributions caps either raised or abolished. It has also submitted that the penalties for exceeding the limits should be modified. SPAA has suggested that the annual contributions limits be doubled to $50,000 for members under 50 years old and increased to $100,000 for members over 50 years old.

So what is a solution that can be implemented now? A possible solution is for the trustee of a self managed super fund (SMSF) to consider borrowing to purchase assets on behalf of the fund. Up to relatively recently it was not possible for a trustee of a SMSF to borrow. Section 67 of the Superannuation Industry (Supervision) Act (SIS Act) provides that an SMSF trustee is prohibited from borrowing, except in specified circumstances. Prior to July 2010 there was doubt as to whether certain instalment share warrants obtained by SMSF trustees breached Section 67.

In July 2010, the government introduced significant changes to the the SMSF borrowing rules. The end result is that the SMSF trustee can borrow to invest in shares, managed funds and property as well as traditional share warrants. It is vital that trustees borrow because such borrowing makes commercial sense and obtain professional advice prior to entering into such borrowing arrangements.

A bi-product of such borrowing will enable trustees to acquire assets over and above the assets that can be obtained from contributions. The caps on contributions can therefore be “overcome” by such borrowings.

Although a trustee of an SMSF can borrow to acquire an asset, there are three requirements:

1) The borrowing must be non-recourse. This means that the lender to the trustee cannot have recourse to the assets of the fund but only to the asset which was obtained with the borrowings.
2) The borrowing must be to acquire an asset that the trusee of the fund is allowed to acquire under the SIS Act.
3) The asset must be held by a bare trustee until the loan is repaid.

A trustee should obtain professional assistance before considering borrowing funds under the new rules. There are some restrictions that a professional advisor can explain to trustees.

It may be necessary for the trust deed of the super fund to be updated as the deed may not contain the necessary powers to borrow and to appoint custodians and bare trusts.

The investment strategy of the fund may also need upgrading. Additionally, auditors may require the trustee to upgrade the risk management document.

The new borrowing powers can be exercised by trustees of SMSFs. These new powers are subject to review in two years time. Such review may result in a tightening of the borrowing powers. Therefore there may be only a two year window of opportunity.
I consider that the government has allowed trustees to borrow to address the perception that many members do not have sufficient amounts in their accounts to enable them to retire comfortably. The government is aware that the leverage gained from borrowings can result in a maximisation of “losses” as well as the maximisation of “profits”. Professional advice is therefore paramount for a trustee.

Note that there is an important underlying requirement of a SMSF trustee to always act in accordance with the sole purpose test which is contained in Section 62 of the SIS Act. The sole purpose test requires the trustee to ensure that the fund is solely for one of the three core purposes laid down in the section. Therefore while the new borrowing rules enable additional assets to be obtained, such borrowings should not be undertaken purely to “overcome” the caps on contributions.

I have provided general information in this article and have not taken into account any specific situation. No one should act on the information contained in this article without seeking prior professional advice.

Darryl Nagel
[email protected]

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