Taxpayer Alert Non-cash Contributions to Super Funds

The ATO has issued an Alert (TA 2008/12) which expresses the ATO’s concerns as to certain contribution practices involving superannuation funds, particularly self managed superannuation funds.

The Alert identifies three types of contribution practices which may involve contraventions of taxation law.

• In specie contributions at undervalue – under this practice an asset (eg shares or real estate) is transferred to a superannuation fund as a contribution and the trustee values the contributed property at less than its market value. The concern is not with in specie contributions – these are acceptable (subject to the normal contribution rules, in house asset rules and anti-acquisition from member rules).  The concern arises because the asset is treated as a contribution of a lesser value than its market value. This practice effectively undermines the contribution caps and may (if all or part of the asset transfer is claimed as a contribution) cause the fund to pay less tax than which is properly payable.
• Third party payment of fund expenses – under this practice a third party (eg member or an associate of a member) pays an expense of the fund (eg audit fees) and does not seek reimbursement from the fund. While it is not a good practice for fund expenses to be paid by third parties, the concern is that if no reimbursement is sought, the effect is to circumvent the contribution caps. Third party payment of improvements to fund assets – under this practice a third party (eg a member or an associate of a member) pays for improvements or repairs to the fund’s property and does not seek reimbursement from the fund. The concern with this practice is that it too circumvents the contribution caps.

The Alert also identified a practice which involves transferring value in a unit trust or company.  Under this practice a member and a superannuation fund trustee each hold units in the unit trust or shares in the company.  The constitution of the unit trust or company is subsequently altered so that the value of the units or shares held by the superannuation fund trustee are increased in value and the units or shares held by the member are decreased in value.

The effect of this practice is to transfer value to the superannuation fund in a manner which circumvents the contribution limits.  There are anti-avoidance provisions in tax legislation which apply to these types of arrangements including the value shifting rules.  Alternatively, the ATO can apply the general avoidance provision in Part IVA.

Why is the ATO so concerned about these practices?

It can be expected that the ATO will be particularly vigilant in detecting and correcting any practices which undermine the contribution caps.  The integrity of the contribution caps is critical to the current superannuation system which gives rise to largely tax free benefits once the recipient reaches the age of 60.  If the ATO is not able to enforce the contribution caps, the current superannuation regime will fail.