Superannuation Contributions and Income Tax — for Self-Managed Superannuation Funds

What is a "contribution" to an SMSF? When is that "contribution" made? The Australian Tax Office (ATO), in its most recent ruling on this issue, answers these questions for superannuation funds generally. This article discusses that ruling for SMSFs.
 

Why does the definition of "contribution" matter for SMSFs?

To attract concessional tax treatment, contributions to an SMSF in each year of income must be below a certain amount — known as a cap. If you exceed the concessional contributions caps, then you are taxed on the amount over the cap.[1] For a discussion on concessional and non-concessional contributions to SMSFs — including a summary of the current rates — see our earlier ClearLaw article 'Understanding - contributions, contributions caps and reserves' here.

A "contribution" is...

A contribution is made to an SMSF when:

  • a person contributes anything of value that increases the SMSF's capital; and
  • that person makes that contribution to benefit one, or more, or all members of the SMSF.

How do you determine a person's purpose for making a contribution?

Providing superannuation benefits must be the person's sole purpose for contributing to the SMSF. However, they can take into account the incidental consequences of making the contribution — for example, obtaining a tax deduction is one acceptable, incidental consequence.

A person's purpose will be viewed objectively, and will be determined by reference to:

  • the object which they have in mind;
  • the natural and probable consequences of their acts; and
  • any purpose which can be inferred from their acts.

For example, a person who makes a contribution will not have a purpose of benefiting an SMSF member if their contribution does not depend on the fact that the other party is an SMSF trustee. Nor will they have the required purpose of making a contribution if they are simply fulfilling the terms of a legitimate contract or arrangement.

Typical transfers, and when the contribution is made

The most common way an SMSF's capital is increased is by a person transferring funds to the SMSF trustee. Generally, the contribution will be made when the trustee receives the funds.

Transferring funds to an SMSF trustee is a contribution even if the transfer is made to reimburse the trustee for a liability incurred while acting as trustee. By satisfying this liability, the contributing person indirectly increases the SMSF's capital. If the person's purpose in reimbursing the trustee for the liability is to increase the benefits members ultimately receive from the SMSF, then they are making a contribution within the sole purpose test set out above.

Here are the common ways that the Commissioner of Taxation (Commissioner) considers that a contribution to an SMSF will be made, and when:

No. If the funds are transferred by ... A contribution is made when ...
1 Making a cash payment (either in Australian or foreign currency) to the trustee The cash is received by the trustee.
2 An electronic transfer of funds to the trustee The funds are credited to the trustee's account.
3 Giving the trustee a money order or bank cheque on which payment is made The money order or bank cheque is received by the trustee, unless the order or cheque is dishonoured.
4 Giving the trustee a personal cheque (other than one that is post-dated[3]) that is presented and honoured with cash or its electronic equivalent The personal cheque is received by the trustee, so long as the cheque is promptly presented and is honoured.
5 Giving the trustee 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, on the date on the cheque), so long as the cheque is promptly presented and is honoured.
6 A related party (as maker) issuing a promissory note, payable on demand at face value, to the trustee 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 trustee and the note is paid with cash or its electronic equivalent[4] 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.

Deducting employer superannuation contributions

If you make a contribution to an SMSF, then you can claim a deduction for a contribution you make to that SMSF if:

  • you make the contribution to benefit another person;
  • you employ the person when you make the contribution; and
  • the contribution provides the employee with superannuation benefits. This requires that the contribution benefits a particular employee who is a member of the SMSF, or benefits all or an identifiable class of employees who are members of the SMSF.

Deducting personal contributions

If you are in 'employment' in the income year, then you must meet an earnings test for a contribution you make to your SMSF to be deductible. Broadly speaking, you are engaged in 'employment' activity if, in an income year, you are engaged in activity which generates income.[2]

An individual taxpayer's personal superannuation contributions are deductible if the contributions are made to a complying SMSF for the purpose of providing superannuation benefits for the taxpayer (that is, themselves).

When you are engaged in employment, you (or your agent[3]) can only claim a deduction if the sum of:

  • your assessable income;
  • reportable fringe benefits; and
  • (as of 1 July 2009) your reportable employer superannuation contributions,

that is attributable to your 'employment' activities, is less than 10% of:

  • your total assessable income;
  • total reportable fringe benefits; and
  • total reportable superannuation contributions in the income year that the contribution is made.

This condition is not relevant if you are wholly self-employed.

Other examples of contributions

  • Transferring an existing asset: an SMSF's capital will be increased when a person transfers an asset to the trustee but the trustee receives no consideration or pays consideration less than the market value. For example, if a person transfers shares they own in a stock exchange listed company to the trustee and the trustee does not pay, or pays less than the market value;
  • Creating rights in the trustee: an SMSF's capital is increased when a person creates a contractual right that the trustee did not previously have, but the trustee pays no consideration or pays consideration less than the market value of the right;[4] and
  • Indirectly increasing the SMSF's capital: a person may pay an amount to a third party to satisfy a liability of a trustee to that third party. For example, a contribution can be made on executing a deed of release which relieves a trustee from the obligation to pay its liability.

Remember in all these cases that the contribution still needs to benefit the SMSF's member(s).

The Ruling also explains key aspects of the rules set out in Division 290 of the ITAA97.

More information from Maddocks

You can read other articles concerning superannuation and SMSFs here.

For questions or more information about the above article, please call Maddocks in Melbourne (03 9288 0555) and ask for a member of the Superannuation Team.

More Cleardocs information on SMSFs

Order SMSF related document packages

Set up an SMSF

Update an SMSF deed

Set up an SMSF pension

Arrange SMSF borrowing lending docs:

Set up an SMSF corporate trustee

SMSF Death Benefit Nomination - binding or non binding

SMSF Death Benefit Agreement - binding and permanent

Download

Download a checklist of the information you need to order a document package.


[1] Income Tax Assessment Act 1997 (ITAA97). See section 280-15(2).
[2] See Superannuation Guarantee Ruling SGR 2005/1, 'Superannuation guarantee: who is an employee?'
[3] For example, your employer or the personal legal representative of a deceased person.
[4] For example a trustee commences to hold a right to receive income or capital from a discretionary trust as soon as the trustee of the discretionary trust allocates the trust income or capital.