Trustees who receive a large inheritance or wish to make substantial catch-up payments into their super prior to retirement face some restrictions in their planning. However, by setting up a unit trust, SMSF trustees can better utilise large sums while keeping within the super contribution caps.
Effective 1 July 2007, non-concessional contributions were capped at $150,000 per annum or $450,000 averaged over three years if you choose to take advantage of the bring-forward rule.
Individuals with large amounts earmarked for super are required to limit their non-concessional contributions to these amounts.
It is still believed that the most flexible way to work with the cap on non-concessional contributions is for individuals to invest jointly with their SMSF and progressively transfer the component of the investment that the members hold personally into their fund using a variation on a strategy in which an SMSF jointly owns assets with their members.
A joint investment by an SMSF and its members is permitted under section 71(1) of the Superannuation Industry Supervision Act 1993 (SISA). This can be achieved by either the fund and the member acquiring the asset as ‘tenants in common’ or alternatively, a trust could be settled with units being allotted to the fund and its members in their desired ratios.
An investment by an SMSF in a related trust is permissible provided the related trust does nothing more than the fund would otherwise have been able to do in its own right.
Discussion regarding the merits of the two alternatives generally revolves around the flexibility afforded by the unit trust in that, if the co-owners wish to change their respective ownership proportions, one would simply transfer units to the other. Unit trusts offer a more commercial means by which co-owners’ interest can be changed over time.
The appeal of using an SMSF in this manner, rather than investing by way of a public offer fund, is that super and non-super capital can be aggregated at the outset without the need to split the capital, thus resulting in the ability of the SMSF trustees to fully utilise their funds for investment purposes.
If a member received a large settlement from the sale of an investment property, say $1 million, and wished to contribute it into their SMSF, they would have to gradually transfer the amount into the fund over a number of years and their capital would be split, with some in super and some held personally in their own name during this period.
If on the other hand an SMSF was established with a related unit trust, with one million $1 units being allotted to the member, the trust would hold the entire capital and be able to invest it at the time the inheritance settled. Over time, the member could transfer, in-specie, the beneficial ownership of their own units in the trust to the SMSF up to the annual cap on non-concessional contributions.
While this cap on non-concessional contributions would still limit the amount able to be contributed into the super fund, the member’s capital would be fully productive in a single investment and be able to be drip fed into a concessionally taxed super environment over time. The transfer of business real property into an SMSF could be done in much the same way.
Andrew Bloore is the chief executive of SuperIQ.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.