Avoiding SMSF tax traps

Craig Day reveals some timely advice on how to avoid the end of financial year SMSF traps.

With the end of the financial year fast approaching self-managed super fund (SMSF) trustees and their advisers need to be aware of any issues that could impact the taxation or compliance of their fund. Here are a couple of tips and traps to consider.

Tip: Record the amount and timing of indirect contributions

In taxation ruling TR 2010/1 Income tax: superannuation contributions, the Australian Taxation Office (ATO) defines a contribution as anything of value that increases the capital of a superannuation fund provided by a person whose purpose was to benefit one or more particular members of the fund or all members of the fund in general. 

This could include situations where the capital of the fund has been indirectly increased, such as where:

• A third party has paid an expense on behalf of a fund and the third party is not reimbursed by the fund;
• A third party forgives a debt owed by the superannuation fund; and
• A third party increases the value of an asset owned by the fund.

For example, where an SMSF’s accounting and audit expenses were paid by a related company, the fund would be considered to have constructively received a contribution, as its liability for those expenses will have been extinguished. 

In this case, as the amount was paid by an entity other than the member or the member’s spouse or parent, the contribution would be treated as a concessional contribution and would count towards the member’s concessional contribution cap.

Trustees therefore need to take care to capture these amounts and include them in the fund’s member contribution statement, which makes up part of the fund’s annual return. Advisers will also need to take care to take these amounts into account when providing any super contributions advice to an SMSF member to avoid a breach of the client’s contribution cap(s).

Trap: Fail to retain evidence of in-specie contributions

Where a member makes a contribution to a fund by way of a transfer of listed shares or business real property, TR 2010/1 confirms that the contribution will be made when the fund obtains ownership of the asset.

The ATO accepts that ownership of the asset, and therefore the making of the contribution, can occur at the time the fund becomes the beneficial owner of the asset and that beneficial ownership can be acquired earlier than legal ownership.

A fund will become the beneficial owner of an asset when it obtains all the required transfer forms in a registrable form along with any other documentation required to procure registration as the legal owner of the asset. 

For example, for an in-specie contribution of listed shares, where a trustee takes possession from a member on 30 June of a properly executed off-market share transfer in registrable form, but the company share register is not amended until 3 July, the contribution will be made on 30 June.

However, the ATO has warned that it will treat any in-specie contribution as being made when the super fund is registered as the legal owner of the asset unless the trustees (and contributor) retain sufficient evidence, such as:

• Minutes of any trustee meeting held to accept an in-specie contribution;
• The relevant transfer forms; and 
• Any other record of when the transfer took place to identify precisely when the fund obtained beneficial ownership. 

Therefore, SMSF trustees should ensure they retain sufficient records of any year-end in-specie contributions to evidence in which financial year the contribution was made. Failure to do so could impact a member’s ability to claim a deduction on a contribution and/or the year in which the amount will count against the member’s relevant contribution cap.

Tip: Acknowledge receipt of valid deduction notice

For a member to be eligible to claim a tax deduction on a personal contribution the member must provide a valid notice to the trustee of their intention to claim a deduction on the contribution within certain time frames and the trustee must acknowledge that notice.

An SMSF trustee should therefore ensure they acknowledge the receipt of any deduction notice in writing back to the member. The acknowledgement should confirm the date of the contribution, the amount of the contribution and the amount the member wishes to claim as a tax deduction.

The member should then keep the confirmation notice with their tax records to avoid the risk that a deduction for a contribution is denied.

Trap: Pre-pay 12 months of interest expenses on a limited recourse loan

While individuals and small businesses are able to claim an immediate deduction where they pre-pay up to 12 months of interest expenses on an investment or business loan, this does not apply to super funds, including SMSFs.

Under the pre-payment rules where an SMSF trustee pre-paid interest on a limited recourse loan, the pre-payment would be apportioned over the period to which it relates and would only be deductible in the relevant year.

For example, if a trustee pre-paid interest on a loan that would accrue during the 2011-12 financial year on 15 June 2011, 100 per cent of the payment would be apportioned to the 2011-12 year and would only be deductible in that year.

Tip: Assess the fund’s in-house asset levels

Where the total level of a fund’s in-house assets exceeds 5 per cent of the net market value of the fund’s assets at the end of the financial year, the trustees will be required to sell down the amount of the excess within 12 months. 

Therefore, where an SMSF has in-house assets the trustees should assess the value of those assets against the 5 per cent in-house asset limit in the lead-up to the end of the financial year.

Where the fund will be close to, or exceed, the 5 per cent in-house asset limit at 30 June, the members may wish to consider making additional personal contributions to dilute the level of the fund’s in-house assets prior to 30 June.

Craig Day is senior manager, technical services at Colonial First State.