Top Superannuation Q&As - August 2016
by Knowledge Shop Editor, on 18/08/16 08:44
This month's top superannuation Q&As live from the Knowledge Shop Help Desk:
- When to refund excess non-concessional contributions
- Purchase of units in a Unit Trust by a SMSF when units held by SMSF members
- Superannuation pensions and tax free status of the SMSF
- Is there a time limit on a SMSF conversion from accumulation phase to pension phase?
- Age conditions for Superannuation Guarantee contributions
1. When to refund excess non-concessional contributions
A member of a SMSF aged over 65 and under 70 years old has contributed $29k as non-concessional contributions to the SMSF in the 2016 financial year. The member has not passed the work test. The member will elect to withdraw the excess contributions and associated earnings.
Am I correct in thinking that under SIS regulation 7.04 the fund was capable of accepting the contributions as all contributions for the year were under the contribution cap applying to the member ($180k), no contravention has occurred (the work test does not affect the SMSF's ability to accept the contribution) and therefore the fund did not have to return the contributions within 30 days.
Is the member allowed to elect the excess contributions into pension phase or must the amounts remain in the accumulation account?
Our view is that if the member did not meet the work test then the trustees should not have accepted the contribution and need to refund the amount to the contributor within the statutory time period.
As per SIS Reg 7.04(1), the trustees can only accept contributions for a member over 65 and under 70 where:
contributions that are made in respect of the member that are:
(a) mandated employer contributions; or
(b) if the member has been gainfully employed on at least a part-time basis during the financial year in which the contributions are made:
(i) employer contributions (except mandated employer contributions); or
(ii) member contributions.
Then as per SIS Reg 7.04(4):
(4) If a regulated superannuation fund receives an amount in a manner that is inconsistent with subregulation (1), (2) or (3):
(a) the fund must return the amount to the entity or person that paid the amount within 30 days of becoming aware that the amount was received in a manner that is inconsistent with subregulation (1), (2) or (3), unless:
(i) for an amount received in a manner that is inconsistent with subregulation (2)--the member's tax file number is quoted (for superannuation purposes) within 30 days of this amount being received by the trustee of the fund; or
(ii) for an amount received in a manner that is inconsistent with subregulation (3)--a valid notice under section 290-170 of the Income Tax Assessment Act 1997 is received by the trustee of the fund within 30 days of this amount being received by the trustee of the fund; .....
My take on this is that the amount should not have been accepted and should be returned - even if the 30 days has passed. Therefore, there is no excess contributions.
As per the ATO view on returning contributions:
"...We consider you are aware that a contribution is in breach of the law when you become aware of the contribution itself. This will generally be on the day you receive the contribution.
In an SMSF, all members of the fund are also trustees of the fund, so members should not make personal contributions that the fund cannot accept. Therefore, it will generally only be contributions by third parties which are at risk of being made against the requirements of the Act.
We expect that trustees to act with care, skill and diligence. We expect you will:
- know that particular contributions breach the super laws
- have a process to work out if the contribution breaches the super laws, within 30 days of becoming aware of the contribution."
It is also our understanding that if the required refund amount is not made within the required timeframe, then it still must be refunded and will lead to a reportable breach of the statutory time periods. Refunding the amount now would allow the auditor to note this on their audit report.
The rules you referred to were around the "fund capped" contributions limits. We still believe that what we have set out above is the relevant issue that needs to be considered.
2. Purchase of units in a Unit Trust by a SMSF when units held by SMSF members
We have a unit trust structure that owns business real property (unencumbered). The units in trust are currently owned in the following percentages:
- Self-Managed Superannuation Fund 57.612%
- Individual 21.194%
- Individual 21.194%
The two individual unitholders are also members of the self-managed superannuation fund. They are the only members of the fund.
The self-managed superannuation fund is looking to acquire the units currently held by the individual unitholders (who are also members of the superannuation fund).
Are there issues with the SMSF acquiring the individual unitholders units given they are related parties but the underlying transaction relates to business real property?
The underlying transaction is not for the business real property, it is for the units in the unit trust.
However, there may be some scope for this.
SIS Section 66 prohibits an SMSF from acquiring assets from related parties - unless an exemption applies:
The member of the SMSF would be considered a related party of the SMSF.
There is an exemption under SIS s66(2A) that allows an SMSF to acquire an asset from a related party if that asset is, or would be an in-house asset in the SMSF. That is, Section 66(2A) of the SIS Act permits a SMSF to acquire units in a trust that complies with SIS Reg 13.22C - this includes acquiring the units from a related party of the fund.
This must be carried out at market value.
The client should make sure that the trust does and continues to meet the SIS Reg 13.22C requirements on an ongoing basis otherwise an in-house asset may arise.
For completeness, it is always worth a full review of the trust to ensure that Reg 13.22C is complied with and that no event under Reg 13.22D has occurred.
The unencumbered asset rule is only one of many requirements under 13.22C so we suggest that you review this regulation completely.
3. Superannuation pensions and tax free status of the SMSF
I have a SMSF with a single member who turned 65 in August 2015 and commenced a pension with a value of $205,000. He made further personal non-concessional contributions following the sale of his business in November 2015 amounting to $50,000. He then commenced an additional pension from these additional contributions in January 2016.
The member did not draw upon his pension until July 2016.
I have requested an actuarial certificate to determine the fund's tax free % for the 2016 financial year based on the member's accumulation phase on the 1st pension for 6 weeks and the 2nd pension between September and January 2016. However, the actuary is advising that the fund is fully taxable for the 2016 financial year as he did not draw upon the pension until July 2016.
Is this correct? I was under the impression that as long as the member received his pension within 12 months that it complies with the SIS/ATO requirements and the earnings of the fund should be tax free for the proportion that relates to the pensions.
For most standard account based pensions, the minimum pension payments must be accessed each financial year. Where the minimum is not taken, the ATO view is that no pension exists - hence the fund being in accumulation phase for the entire year. There may be different rules for other styles of pensions but SMSFs would, in most cases, be paying account-based pensions, especially if they commenced in 2016.
Failure to comply with pension rules
18. A superannuation income stream ceases for income tax purposes if any of the requirements of the SISR 1994 relating to the payment of the superannuation income stream are not met in a financial year. This is the case even if a member remains entitled to receive a payment from the superannuation fund in relation to the purported superannuation income stream under the governing rules of the superannuation fund, or under general trust law concepts.
19. The trustee is taken not to have been paying a superannuation income stream at any time during the income year in which the requirements are not met.
20. If the requirements are again met in the following year this results in the commencement of a new superannuation income stream.
Example 6: failure to meet minimum annual payment requirement - cessation of superannuation income stream
42. Bill is a member of the JKL Superannuation Fund (a self managed superannuation fund) and has commenced a superannuation income stream (an account based pension). The minimum annual payments required under clause 1 of Schedule 7 of the SISR 1994 were made to Bill during the 2010-11 and 2011-12 years.24 At the start of the 2012-13 year the trustee of the JKL Superannuation Fund calculates that the minimum annual payment required to be made under clause 1 of Schedule 7 of the SISR 1994 for that year is $1,000.
43. During the 2012-13 year the trustee of the JKL Superannuation Fund makes a single payment to Bill of $50. As this amount is less than the minimum annual payment required, the superannuation income stream has not met the requirements of the SISR 1994 for the 2012-13 year. The superannuation income stream ceases for income tax purposes at the beginning of this income year, and the $50 payment is a superannuation lump sum.
44. This is the case even if Bill remains entitled to receive a payment from the superannuation fund in relation to the pension under the governing rules of the superannuation fund, or under general trust law concepts, in future years. If the relevant SISR 1994 requirements are again complied with in the 2013-14 year, this results in the commencement of a new pension.
61. The definition of a 'pension' under paragraph 1.06(9A)(a) of the SISR 1994 includes two fundamental requirements, being that:
- payment should occur at least annually, and
- a minimum amount must be paid to the member each year.
4. Is there a time limit on a SMSF conversion from accumulation phase to pension phase?
A member of a SMSF is over the age of 65 in the 2016 financial year (turned 65 in August 2015). He then takes money from the SMSF as pension payments.
During the 2016 financial year, he has also received super contributions from his employer as he has been working during the year.
So, in the 2016 financial year, the SMSF will be part-pension and part-accumulation (because of the employer's contribution).
My question is that if the SMSF wants to convert the accumulation part to pension, is there any time limit on that conversion?
For example, if the member received super contribution from his employer on 01/10/2015, can the SMSF convert such contribution into to pension on 02/10/2015? Or there are any restrictions?
The commencement date of a pension will depend on the wording and requirements of the trust deed. This usually sets out what needs to be to done for a pension to exist.
Based on the wording of the deed, arguably, it may even be possible to commence the new pension on the day the contribution is received into the fund.
The ATOs views are set out in TR 2013/5.
When a superannuation income stream commences
9. A superannuation income stream can never commence before all the capital which is to support that income stream has been added by way of contribution or rollover to the relevant superannuation interest from which the superannuation income stream is to be paid.
10. Subject to what is said in paragraph 9, a superannuation income stream commences on the first day of the period to which the first payment of the superannuation income stream relates (the commencement day).
11. When the commencement day occurs must be determined by reference to the terms and conditions of the superannuation income stream agreed by the trustee and member, the rules of the superannuation income stream as set out in the governing rules of the superannuation fund and the relevant regulations of the SISR 1994.
12. The commencement day may occur before the due date of the first payment, depending on the rules which govern the superannuation income stream, but the commencement day cannot precede the date of the member's request or application. Further, the commencement day cannot occur prior to:
- the day established as the commencement day in the terms and conditions agreed between the member and the trustee that will govern the superannuation income stream; or
- in circumstances where a member or dependant beneficiary becomes entitled to the superannuation income stream under the governing rules of the superannuation fund, the time at which the entitlement to start the income stream arises.
13. Once a superannuation income stream commences it is payable (that is, there is an obligation to pay superannuation income stream benefits from that superannuation income stream) until such time as that superannuation income stream ceases. This remains true even if the member dies before any payment is due to be made under the terms of that arrangement.
You should make sure that the documentation surrounding the pension is in line with the trust deed requirements.
5. Age conditions for Superannuation Guarantee contributions
An employee is 75 and has returned to work on a casual basis. Their income is approximately $1,000 per month.
- Is the employer required to pay 9.5% super Superannuation Guarantee contributions?
- Are there any issues with the fund accepting Superannuation Guarantee contributions?
- Are there any age issues in the future which affect either Q1 or Q2? For example, if the taxpayer works until age 85, is the employer still required to make SGC and the fund is able to accept them?
There is no longer an age limit for SG contributions. An employer is required to pay SG for all eligible employees regardless of age.
The changes were set out in Superannuation Guarantee (Administration) Amendment Bill 2011:
The explanatory memorandum to the Bill reads:
1.1 This amendment removes the exclusion relating to the age of an employee at which superannuation guarantee no longer needs to be provided.
1.2 From 1 July 2013, employers will no longer be able to avoid or cease making superannuation guarantee contributions on behalf of eligible employees who are 75 years of age or over.
Visit the ATO page Working out if you have to pay super to assist with who is eligible for SG.