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Spotlight on superannuation contributions

a hidden gem in new draft legislationThe rules relating to superannuation contributions are constantly changing. Consider, for example, a deceptively simple question: How much after tax contributions can a person make? Depending on when in the last 11 years this question was asked, there have been at least four answers and there will soon be a fifth answer. Similarly, consider for example, another deceptively simple question: How much tax-deductible contributions can a person make? Depending on when in the last 11 years this question was asked and the relevant person’s age, there have been at least nine answers and there will soon be a tenth answer!

However, there are some constants. In this article I am keen to review a few issues that — regardless of changes to the rules — are fairly constant.

30 June is not the real deadline for contributions

If a client asks when is the latest date that they can make a contribution for a financial year, the short answer is 30 June. However, this is a very dangerous answer to give. I think the practical answer should be 20 June.

Consider, for example, the case of Liwszyc v Commissioner of Taxation [2014] FCA 112. Mr Liwszyc was the sole director of a company. On 30 June 2009 the bookkeeper of the company made two superannuation contributions in respect of Mr Liwszyc. The payments were made via BPay. However, the superannuation fund (AMP Superannuation Trust) did not show the contributions as having been received until 1 July 2009. Naturally, this meant the contributions were recognised in the 2010 financial year instead of the 2009 financial year. This was despite Mr Liwszyc’s evidence that the payments were clearly marked as being for the 2009 financial year.

This meant that Mr Liwszyc had excess concessional contributions and also exposure to excess concessional contributions tax! (Note that the subsequent introduction of div 291 into the Income Tax Assessment Act 1997 (Cth) means that these facts will no longer give rise to excess concessional contributions tax. However, they can still give rise to negative tax implications.)

This case illustrates the dangers of leaving contributions to the last minute.

I think that advisers need to build a buffer regarding contributions. For example, advisers might contact clients well before the end of the financial year and say that they would be wise to pretend that there is a moratorium on contributions between 20 June and 10 July. Further, advisers might say that if a client wants to make a contribution for a financial year it must be made before 20 June, thus leaving a 10-day window for payments to be cleared etc.

However, in spite of the above, there will always be some clients who do not act until the last possible minute. I think advisers should issue a very substantial disclaimer where a client delays acting, and subsequently acts in the period between 20 and 30 June.

Accidentally triggering the ‘bring forward’ rule is still disastrous

Once upon a time, triggering the’ bring forward’ rule was absolutely disastrous. For example, consider the following:

Johan intended to make $150,000 of non-concessional contributions in the 2008 financial year and then $450,000 in the 2009 financial year. He thought he had done just this. However, many months after the end of the 2009 financial year he receives a letter from the ATO that effectively alerts him that a $1,000 insurance premium he paid in the 2008 financial year actually constituted a non-concessional contribution. This gave rise to an excess non-concessional contributions tax liability of over $70,000 and it was very hard to get out of this liability.

However, both ATO policy and the law itself have been altered and so the above situation — which of course was absolutely disastrous — will no longer arise.

However, accidentally triggering the ‘bring forward’ rule is still disastrous (although no longer absolutely disastrous). Consider the following:

Keith turned 64 in the 2016 financial year and will turn 65 years old in the 2017 financial year. He wants to maximise his non-concessional contributions in conjunction with a withdrawal and re-contribution strategy. He withdrew $180,000 from superannuation in the 2016 financial year and then recontributed it. Now, he wants to withdraw $540,000 in the 2017 financial year and recontribute it. However, it has just been discovered that he paid a $1,000 insurance premium in the 2016 financial year that actually constituted a non-concessional contribution.

If he now proceeds with the $540,000 withdrawal and re-contribution, it will no longer give rise to an excess non-concessional contributions tax liability of over $70,000. However, proceeding might cause Keith to have to withdraw $181,000 (ie, $540,000 less $1,000 less $180,000 less $540,000), plus 85% of a deemed ‘associated earnings’ amount. The reason why this is disastrous is that people such as Keith habitually want to implement these sorts of strategies in the lead up to turning 65 years old by using a withdrawal and re-contribution strategy and then once the three-year ‘bring forward’ period has refreshed itself (ie, they can put the $181,000+ back into super), they are then over 65 years old and the gainful employment test might prohibit any further contributions. Effectively it means that accidentally triggering the ‘bring forward’ rule causes someone to have to live out their retirement with $181,000+ less in super.

Market value means market value at the point in time of the contribution

The ATO and the government have been very worried in the past about people manipulating off-market transfers of listed securities to pick a date in the past that provides them with a lower capital gain outside of superannuation. A few years ago, there was even a bill proposing to ban off-market transfers to superannuation. Although the ban was never ultimately implemented, there is still a valid point: it is simply not allowable to pick a past date for a transfer. The transfer occurs at the moment when the fund obtains a properly executed off-market share transfer in registrable form. Members and trustees should not manipulate the market value by trying to choose a date in the past.

Conclusion

The contribution rules are a moving target. However, I am reminded of the old saying from the French journalist Jean-Baptiste Alphonse Karr: the more things change, the more they remain the same (‘plus ça change, plus c’est la même chose’). I think this saying is very true in respect of the issues described in this article.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

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