Understanding the definition of a super contribution can guide SMSFs

The Australian, August 1, 2016:

What is a superannuation contribution? It’s important to know what it is because it can have big implications for staying under the contributions cap.

The superannuation law does not define the term “contribution”. However, in the Tax Office’s publication, Tax Ruling 2010/1, it states a “contribution” is anything of value that increases the capital of a superannuation fund, provided by a person, whose purpose is to benefit one or more particular members of the fund or all of the members in general. Not every increase in the capital of an SMSF is treated as a contribution. We must consider the probable consequences of a transaction to determine whether a contribution has been made. A person’s objective purpose is taken into account and not their subjective intention. An increase in an SMSF’s capital due to income, profits and gains arising from the use of the SMSF’s assets, is not derived from someone whose purpose is to benefit the SMSF’s members.

For example, an SMSF’s bank’s intent is that it pays interest on deposits due to obligations arising under the contract it has with the SMSF and not to benefit SMSF members; or a company pays a dividend to provide a return to its shareholders and not to benefit the members of a particular shareholder that happens to be a superannuation provider.

But there are other situations where a member may not realise they have made a contribution to their SMSF. For example:

  • A member transfers an asset without consideration to their SMSF;
  • A member satisfies an SMSF’s loan obligation as a guarantor to the loan. The guarantor’s payment extinguishes the SMSF’s liability to the lender and increases the capital of the SMSF;
  • A member adds a fixture to an SMSF’s property;
  • A member pays the SMSF’s expenses. The payment of the expenses increases the capital of the SMSF because it extinguishes the liability of the SMSF.

The timing at which a contribution is made will determine whether the person who made the contribution is eligible to claim a tax deduction in a particular financial year, as well as whether they have exceeded their contributions caps.

In accordance with Tax Ruling 2010/1, a contribution is made when the capital of a fund is increased, and the capital of the fund is increased when an amount is received, or ownership of an asset is obtained or the fund otherwise obtains the benefit of an amount. The ruling provides a range of examples. Here are six key events to watch carefully:

1 Cash and EFT transfers

A cash contribution or a contribution made by an electronic funds transfer is made when the amount is received by the SMSF trustee or credited to the relevant SMSF bank account.

2 Cheques and promissory notes

A contribution by money order, cheque or promissory note is made when they are received by the SMSF. If a cheque is postdated or a promissory note is payable on a date later than the day on which the note is received, then the contribution will be made on the later of the day the cheque or note is received and the date on which payment can be demanded as shown on the cheque or note. No contribution is made if the cheque or note is dishonoured.

3 Property transfers

A contribution by way of a property transfer is made when the SMSF obtains legal or beneficial ownership of the asset from the contributor. Beneficial ownership may be acquired earlier than legal ownership in situations where an SMSF acquires physical possession of the property. However, ownership of property may also pass on the execution of a deed of transfer of the property notwithstanding there has been no change in the physical possession. Legal ownership of property is normally evidenced by a system of formal registration where the SMSF is registered as the owner. In the case of a sale and an acquisition of land, beneficial ownership normally passes when the purchase is settled and the buyer hands over the purchase price in exchange for a completed transfer in registrable form.

  1. Share transfers

A contribution of shares in a company is made when the legal ownership of the shares is recognised by the SMSF’s name being registered in the company’s share register. This is for shares in a publicly listed company processed through the Clearing House Electronic Sub-register System (CHESS). However, beneficial ownership of shares in an Australian Securities Exchange-listed company can be made through an off-market share transfer, when the SMSF obtains a properly executed off-market transfer in registrable form.

  1. Improvements to an asset

A contribution is made when the capital of the SMSF is increased because of the increase in value of the SMSF’s asset due to the improvements made.

  1. Payment of a liability

A contribution is made when a person satisfies an SMSF’s liability. Knowing whether and when a contribution has been made can prevent you paying excess tax.

In general, whether a contribution is made when beneficial ownership of property or assets occurs is determined on a case-by-case basis. An SMSF trustee that seeks to argue that the contribution of property occurs when the beneficial — not legal ownership — of the asset passes to the SMSF, must retain sufficient evidence of the relevant transactions and events to precisely identify when the change of beneficial ownership occurs.

Evidence can include: trustee minutes, relevant transfer forms, and any other record of when the transfer occurred. Without evidence, the contribution will be considered made when the SMSF obtains legal ownership of the property.

Monica Rule is an SMSF specialist and author of The Self Managed Super Handbook.