Financial Year-End Contributions & Strategies

20 June 2011

Many people make last minute contributions at the end of June to fully utilise their contribution caps.  However, the Australian Taxation Office ("ATO") has specific rules in relation to when a contribution is considered to have been made.  This may result in excess contributions for some individuals as contributions intended for one income year may be counted as contributions for the ensuing income year.  It has been reported that the Government has raised $400 million through tax penalties in excess superannuation contributions between 2006 and 2010 and this figure may rise.

The timing issue is also significant where the contribution reserve is used.  The SIS Regulations allow a superannuation contribution to be made in one income year and then allocated to the member in the next income year as long as the allocation is made within 28 days of the month in which the contribution is made [SIS Regulation 7.08(2)]  This has provided some scope to make contributions that traverse two income years.  The contribution reserve is strictly speaking a suspense account rather than a reserve.

This article clarifies the timing for the recognition of contributions and provides an explanation of contribution reserving strategies with some scope to rectify inadvertent excess contributions as long as the contribution has not yet been allocated.

Starting Points

There are four starting points to note in relation to year-end contributions.

  • The ATO’s interpretation as to when a contribution is made under the SIS Act 1993 and the Tax Act 1997;
  • Where the super fund maintains a contribution reserve, the point in time the contribution is counted towards the member’s contribution cap;
  • Where the contribution is a concessional contribution, the income year in which a deduction can be claimed;
  • Generally, unintentionally exceeding a contribution cap, misunderstanding the law or fact, or having been given incomplete or incorrect advice do not amount to special circumstances so that the Tax Commissioner will disregard or reallocate a contribution.

When a Contribution is Made?

Different provisions apply to contributions made by cash / fund transfers and in-specie transfers.  These aspects have been dealt with extensively in the ATO TR 2010/1.

Cash or fund transfers

  • Cash payment in Australian or foreign currencies:  The contribution is made when the cash is received by the super fund.
  • Electronic transfer of funds:  The contribution is made when the funds are credited to the super fund’s account.
  • Money order or bank cheque:  The contribution is made when the money order or bank cheque is received by the super fund, unless the money order or cheque is dishonoured.
  • Personal cheque (other than post-dated cheque):  The contribution is made when the personal cheque is received by the super fund, so long as the cheque is promptly presented and honoured.
  • Post-dated cheque:  The contribution is made on the date of the cheque (i.e. when the cheque is able to be presented), so long as the cheque is promptly presented and honoured.

Examples

  • A contribution made by electronic transfer of funds on 29 June 2011 with the funds credited to the super fund’s account on 1 July 2011 will be treated as a contribution made in the 2011-12 income year.
  • A contribution made by cheque on 29 June 2011 and presented on the same day will be treated as a contribution for the 2010-11 income year, even though the funds may be credited to the super fund’s account after 30 June 2011.  This has to be reported correctly in the tax returns.


In-specie transfers

With in-specie transfers, the ATO considers that a contribution is made when the SMSF obtains "beneficial ownership" of an asset which can be earlier than the transfer of legal ownership.

  • Transfer of real property:  A contribution is made when the super fund obtains possession of a properly executed transfer that is in registrable form together with title deeds and other documents necessary to procure registration of legal ownership of the property.
  • Shares or units listed in the Australian Stock Exchange:  A contribution is made when the super fund obtains a properly executed off market share transfer form in registrable form.  There may be changes to off market transfers post the Cooper Review.

The super fund must retain sufficient evidence of relevant transactions and events.

In addition, apart from funds contributions and in-specie contributions, there are other transactions that may give rise to deemed contributions.  Failure to recognise deemed contributions may result in inadvertent excess contributions, as these are also counted towards the contribution caps.  Deemed contributions are transactions that may result in value shifting to the fund e.g. contribution by way of improvement of an asset of the fund.  Rollover of superannuation benefits from an overseas fund to an Australian fund is also treated as contributions.

Understanding the timing of contributions and the transfer or transactions that make up the contributions will prevent unnecessary excess contributions.

Contribution Reserves (SIS REG. 7.08 (2))

It is possible to manage contribution caps through use of the 28 days rule that allows current year contributions to be allocated to the member in the ensuing year of income.  The contribution will be counted towards the member’s contribution cap in the allocation year and not in the contribution year.

This aspect has been confirmed by the ATO in the ATO’s Superannuation Technical Minutes of June 2009.  This  is to avoid double counting of contributions as both contributions made in a year of income and contributions allocated in a year of income are recognised as contributions under the Tax Act 97.  (Sections 292.90 and 292.25)

To utilise this strategy, the contributions must be allocated to the member of the fund within 28 days after the end of the month of the contribution or as soon as it is practicable to allocate the contribution.  [SIS Regulation 7.08(2)].  However, to meet the ATO requirements, the contribution must be allocated within the requisite 28 days.

Example

  • A contribution is made on 25 June 2011 and held by the super fund in contribution reserve.
  • The contribution is allocated to the member on 10 July 2011.
  • The contribution is counted towards the 2011-12 contribution cap of the member.

This provides some scope to rectify contributions inadvertently made in excess as long as the allocation has not yet been made and the contributions are correctly recorded and reported.

Tax Deductions

As a further step, the ATO also acknowledged that while the contributions are counted towards the contribution cap in the of year of allocation, "this does not alter the timing of the deductions for the contribution" (Sections 290.60 and 290.150 Tax Act 97).  This means that while contributions are counted towards the contribution cap in the year of allocation,  the tax deductions are available in the year that the contribution is made.

Understanding the timing of contributions and the potential for allocating current year contributions in the next income year with current year deductions provide ways to effectively manage contributions and the relevant contribution caps.  Meanwhile, the ATO has stated that the income tax regulations do leave "some scope for manipulation and concerns have been raised with Treasury."

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