A super fund with no contributions caps? It’s possible

SMSF technical expert and columnist for The Australian newspaper
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Today I’m going to discuss an interesting contribution strategy that has been getting airplay recently. But first up, to put you in the picture more clearly, I need to discuss some background information.

Your super fund will be entitled to tax concessions if it’s a resident regulated superannuation fund and a complying super fund at all times throughout a financial year. These are both legislative terms.

If you set up your fund after June 1994, one step you completed would have been to elect that your fund was a regulated super fund.  This election is prospective (not retrospective), irrevocable and, in effect, means you’ve elected to forever be regulated under the Superannuation Industry (Supervision) legislation, or whatever its legislation is in the future. Your fund can’t get the super fund tax concessions unless it makes this election.  If you don’t make this election, your fund is taxed at 46.5% of the fund’s income, including realised capital gains.

The concept of complying and non-complying super funds has been around for at least 30 years.

Prior to Peter Costello’s contribution caps, Paul Keating had allowed unlimited amounts into super but put in place tax penalties when you wanted to pull out too much.

Costello changed Keating’s design to effectively restrict the amount of money you could put into super. The specific design of Costello’s policy is that we all contribute money into super during our working lives.

The advent of contribution caps and non-complying super funds needs to be explored. Put simply, the contribution caps only apply to a complying super fund, which means regulated super funds only.

So what does this all mean?

Does this mean therefore that you can establish a super fund, contribute above the contribution caps (whilst it’s a non-complying super fund) and then elect to make it a regulated super fund?

In simple terms, yes.  However, employer contributions made to non-complying super funds will incur Fringe Benefits Tax. Personal contributions claimed as a tax deduction and employer contributions will be taxed at 46.5% in the year they’re made.

But this tax rate rule doesn’t apply to personal contributions not claimed as a tax deduction.

So the strategy works something like this:

  1. During a financial year, create a super fund, which you don’t elect to be regulated by the super laws in that year.
  2. You make personal contributions that aren’t claimed as a tax deduction to that super fund. Those contributions could technically be for any amount, including above the relevant personal contribution cap that applies to you.
  3. In the next financial year, elect for the fund to be regulated by the super laws. As mentioned, this election is prospective not retrospective.

So what are the risks?

I can think of several and maybe others will think of more:

  1. Income tax anti-avoidance provisions – this is a very complex area and one that requires careful analysis.
  2. I won’t go into specific details here but about 15 years ago, the black letter law technically allowed you to avoid contributions tax and the dreaded super surcharge that applied at the time. To correct this loophole, the Government changed the tax laws, and the Tax Office successfully took several people to court.  In every case, the taxpayer lost, even though the black letter law allowed the transaction.
  3. In 2001, the Administrative Appeals Tribunal heard a case that involved an unregulated fund that had been created. Certain transactions were performed in the fund that would have breached the super laws if the fund had been regulated under these laws.  Once these were completed, the fund became a regulated super fund. The ATO made the fund non-complying and the taxpayer appealed, but lost.

Should you implement this strategy? That is for you and your advisers to decide. This article is not saying this is a legitimate strategy for anyone. You need to carefully consider all the relevant issues involved.

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. Anyone should consider the appropriateness of the information in regards to their circumstances.

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