SMSF Year End Planning : 2012 Traps for SMSF Trustees
Danger ahead for SMSF Trustees : Contributions and pensions
In the lead up to the end of the financial year the financial press is filled with articles regarding year end tax planning and superannuation strategies. In my experience though, it is usually far more mundane matters that are likely to trip up SMSF trustees. Last year many exceeded their contributions caps because the year had 27 fortnightly pay cycles. This year’s trap revolves around the fact that 30 June falls on a Saturday.
Why is Saturday 30 June 2012 a trap for SMSF Trustees?
Many trustees, typically busy professionals or small business owners, only get around to thinking about year end superannuation matters on the 30th of June each year, making last minute contributions and payments on the last day of the financial year.
Electronic banking systems typically process these transactions on the business day they are entered or on the next business day. As 30 June 2012 falls on a Saturday, any electronic banking transactions entered on 30 June 2012 (or more precisely after close of business on 29 June 2012), will not be processed until Monday 2 July 2012. These last minute transactions will therefore appear on the funds bank statements dated 2 July 2012.
The ATO recognises contributions when “the funds are credited to the superannuation provider’s account” and would normally look to the bank statements for evidence of when the funds were “credited”. Transactions entered on 30 June and appearing on a bank statement on 2 July 2012 will therefore be regarded as a contribution in the 2012/13 financial year.
This will be a particularly bad outcome for those SMSF members who are over 50 and eligible to contribute $50,000 in concessional contributions before they are reduced to the general $25,000 cap for at least the next two years. If the $50,000 contribution is not “credited” until 2 July 2012, the contribution will be counted as part of the 2012/13 contributions. It will therefore exceed the 2012/13 contribution caps by $25,000 and will be subject to additional tax at 30.5% (to bring the overall tax rate up to the top marginal rate). The $25,000 excess contribution will also be counted toward the non-concessional cap, potentially triggering further contribution cap issues.
Set out below is a table from ATO Tax Ruling 2010/1 which details when the ATO regards contributions as having been made:
|No.||If the funds are transferred by …||A contribution is made when …|
Making a cash payment (either in Australian or foreign currency) to the superannuation provider
|The cash is received by the superannuation provider.|
An electronic transfer of funds to the superannuation provider
The funds are credited to the superannuation provider’s account.
Giving the superannuation provider a money order or bank cheque on which payment is made
The money order or bank cheque is received by the superannuation provider, unless the order or cheque is dishonoured.
Giving the superannuation provider a personal cheque (other than one that is post-dated) that is presented and honoured with cash or its electronic equivalent
The personal cheque is received by the superannuation provider, so long as the cheque is promptly presented and is honoured.
Giving the superannuation provider a personal cheque that is post-dated and that is presented and honoured with cash or its electronic equivalent
The cheque is able to be presented for the payment (that is, the date on the cheque), so long as the cheque is promptly presented and is honoured.
A related party (as maker) issuing a promissory note, payable on demand at face value, to the superannuation provider and the note is paid with cash or its electronic equivalent
The promissory note is received, so long as payment is demanded promptly and the note is honoured.
|7||A related party (as maker) issuing a promissory note, payable on a future date at face value, to the superannuation provider and the note is paid with cash or its electronic equivalent||
Payment is able to be demanded or required to be made, so long as the demand (if required) is promptly made and the note is honoured.
Any good news on contributions?
Fortunately, the tax ruling noted above goes on to note the following:
“187. A superannuation provider’s account statement would normally provide the best evidence as to when a contribution is received. However, in limited circumstances, other evidence may be used to determine when a contribution is made. For example, a transfer of funds between the linked accounts of a member of a self-managed superannuation fund and the fund held at the same financial institution may result in a contemporaneous debit and credit to the respective accounts with the funds being immediately available for use of the self-managed superannuation fund. When such a transfer occurs on a week-end, it is common for bank statements to show the transaction occurring on the next business day. Evidence, such as a computer print-out recording the receipt of the amount into an account of the superannuation provider, may be used to establish the timing of the contribution. “
Recent Tax cases regarding contributions
When highlighting this issue to some Trustees I have received comments to the effect “Surely the ATO would be flexible and understand the contribution was really intended to be in the prior financial year”. This is exactly the arguement put by Trustees in some recent cases regarding the timing of contributions – and unfortunately for them the ATO was not at all understanding. A good (and easy to understand) summary of recent cases in this area can be found at the SmartCompany website (click on the following link http://www.smartcompany.com.au/superannuation/050305-the-june-30-super-contribution-trap.html?utm_source=SmartCompany&utm_campaign=67167afc69-Thursday_21_June_201221_06_2012&utm_medium=email)
Key points for SMSF Trustees
- Ensure all superannuation contributions are processed by your bank well before the close of business on 29 June 2011
- Keep all documentation confirming submission of contribution, including screen shots and on-line banking receipts
- Members of SMSF’s paying pensions also need to ensure the fund has have paid the minimum annual pension amount before close of business on 29 June 2012. If a fund has not paid the minimum pension amount (whether as a series of payments or a single annual payment) then the fund will not have satisfied the requirements associated with claiming “exempt pension income” and earnings of the fund underpinning will become taxable (at 15%).