Non Complying Super Fund - May Still Have Uses

What would happen if contributions were to a non-complying superfund?  Would those contributions be counted for contribution cap purpose?  

Consider the following strategy.

During Financial Year 1, personal contributions (and only personal contributions) are made to the super fund.  Third party contributions are included in the assessable income of the fund.  Additionally, employer third party contributions would attract FBT.  However, personal contributions are not included in the assessable income of the super fund.

No deduction is claimed (or can be claimed) for the personal contributions.  The contributions form part of the corpus of the fund.

Next 1 July the trustees make an election that the super fund be a regulated super fund.  The effect of the election is on a prospective basis only.  If the effect of the election were retrospective – the intended outcome would not be achieved.

For Financial Year 1, the fund is a non-complying fund – it will be taxed as a non-complying fund at 45% on its investment income.  The personal contributions do not form part of the assessable income of the fund under Sub-Division 295C or Sub-Division 295E.

Once the fund makes an election to be regulated – the fund will be a complying fund in Financial Year 2.  The election will only operate on a prospective basis.

However, the fund is moving from non-complying to complying (and not vice versa) so s295-325 should not apply.

The personal contributions made in Financial Year 1 should not constitute non-concessional contributions in respect of the fund, as at the time they were received, the fund was not a complying super fund.  Further, as the personal contributions were not included in the assessable income of the super fund they would form part of the contributions segment and so would be part of the tax free component.

While this strategy at first glance seems very interesting – whether the intended outcome is achieved will require a very detailed analysis of the Income Tax Assessment Acts and, in particular, Part IVA.

In AAT case [2001] AATA 626, an unregulated super fund was established and certain actions undertaken and then an election was made to be regulated.  The actions undertaken would have infringed the SIS Act if they were undertaken while the fund was a regulated super fund.  The present situation is different: there is no SIS Act or Tax Act contravention in exceeding the contribution caps.  In relation to breaching the fund capped contributions acceptance rule, while this rule only applies to a regulated superannuation fund, the principle behind the AAT case would not be infringed if the personal contribution was made by a number of discrete contributions each of which is under the relevant fund capped contribution amount.