Transitional Measures for the $500,000 cap

It seems (based upon a response to a question posed during the course of the campaign) that the Government will introduce transitional measures in relation to this $500,000 cap.  The transitional measures will apply in two situations.

The first situation is where a super trustee had entered into a contract of sale before 3 May 2016 where completion of the contract was dependent upon the members of the fund making non-concessional contributions after that date.  The second situation applies to excessive LVR related party limited recourse borrowing arrangements where it is intended that the ratio will be brought within the safe harbour level by the making of additional non-concessional contributions.

The effect of these two transitional measures is that non-concessional contributions which exceed the proposed lifetime cap will not be treated as giving rise to excess contributions – these contributions will be “privileged” in the sense that they will not give rise to excess contributions tax liability (or be required to be refunded).

First transitional exception

Consider, for example, the position of the AB Superannuation Fund.  This fund has one member.  The trustee and the sole member have agreed upon the purchase of real estate valued at $500,000.  The fund can pay the deposit and other related acquisition costs.  However, the fund cannot pay the balance of $450,000.  The sole member does have the means and intended to finance the balance of the purchase price by way of additional non-concessional contributions.  The sole member intends to make a $450,000 non-concessional contribution after 3 May 2016, thereby permitting the trustee to complete the acquisition.  

The contract is signed and the deposit is paid on 1 May 2016.  On 3 May the Budget is handed down and the sole member is now subject to the $500,000 cap.  Unfortunately, the sole member has previously made sufficient non-concessional contributions before 3 May 2016 to have exhausted the cap.

In this situation the (proposed) transitional measure will apply so that the sole member can contribute $450,000 non-concessional contributions.  These contributions will be “counted” for the purposes of the cap but will not give rise to an excess contribution amount: they are “privileged” contributions.

Alternatively, if the sole member had previously contributed $300,000 of non-concessional contributions before 3 May 2016, and then contributed $450,000 after 3 May 2016, the entire $450,000 will be counted as a non-concessional contribution thereby exhausting the new lifetime cap.  However, the $250,000 in excess of the proposed cap will be treated as failing within the transitional rule and will not give rise to excess contributions.  In this case, the $250,000 will be “privileged” contributions.

Second transition exception

Consider the JB Superannuation Fund which has a related party limited recourse borrowing arrangement involving real estate where the current LVR is 90%.  The safe-habour LVR in this situation is 70%.  If the market value of the real estate is $800,000 then the excess LVR is 20% which equates to $160,000.

If the sole member of the JB Superannuation Fund has already exhausted the (proposed) lifetime cap, then the sole member could make up to $160,000 of additional non-concessional contributions which would all be “privileged” contributions – ie not giving rise to an excess contribution tax liability and which are not required to be refunded.

Caution required

These “transitional measures” arose in the heat of an election campaign.  While welcome, it would be prudent (if possible given, in the case of the first measure, the need to satisfy the contractual obligations of the impending settlement) to defer relying on the measures until they are confirmed by the Treasurer after his swearing in.

Particular situation of off the plan purchases

Possibly, the most problematic situation is that of “off the plan” purchase arrangements.  Typically, in an “off the plan” arrangement, the purchaser will pay 5% on exchange with settlement only occurring after the building has been completed, the plan of subdivision registered and the certificate of occupancy provided.  It may be 2 years or more between exchange and settlement.  
Will the first transition exception apply even though settlement may take some considerable time after 3 May 2016?

What the transitional measures don’t cover

The transitional measures will not apply to the following situations:

• where the LVR exceeds the safe-harbour limit and the lender is not a related party lender – the transitional measure will not apply simply because the LVR of an arrangement involving an unrelated lender cannot be excessive;
• where an unrelated lender is voluntarily replaced with a related party lender so that the LVR of the arrangement is now excessive.  This simply seems to be too smart a move.  However, what if the unrelated lender forces a refinance because of a change in the membership of the fund or any reason initiated by the lender?

What we don’t know about – the unknown unknowns & integrity measures

There are, in relation to the transitional measures, a number of issues which we don’t know about.  Some of these issues are considered below.

In the case of a multi-member superannuation fund where some members have exhausted their lifetime caps while other members have not exhausted theirs, how will the right to make “privileged” contributions be allocated amongst the members?   Clearly, if the members are part of the same family group, there will be a strong incentive for the “privileged” contributions to be made by members who have already exhausted their lifetime cap.  

How will the ATO prevent this abuse of the transition measure?  Will the “privileged” contributions be required to be made in proportion to current member balances?  Will it be a requirement that any additional contributions be made by those members who have not yet exhausted their lifetime cap thereby minimising the amount of “privileged” contributions?  Will the ATO bother to consider the issue given the presumably small number of cases?

Further is the ability to make “privileged” contributions a property of the relevant fund or of the members of the fund?  If the former, then a new cohort of members could be admitted to the fund to replace the current cohort and the new cohort would have the right to make “privileged” contributions.  If this were possible, would any new cohort of members wish to be admitted to a fund which has a limited recourse borrowing arrangement on foot?