Understanding in-specie contributions of property

The Australian Taxation Office has recently provided some clarification regarding in-specie contribution of property. Nicholas Ali explains.

At the June 2012 National Tax Liaison Group (NTLG) Superannuation Technical Sub-Group meeting, the Australian Taxation Office (ATO) was asked if a property transferred in-specie for a member could be allocated to the member's account over two financial years using a contributions reserve/unallocated contributions account (prima facie a contributions reserve).

For example, let's assume Adam (aged 61) is looking to transfer a commercial property he owns to his self-managed super fund (SMSF).

The commercial property is worth $600,000 and Adam makes an in-specie contribution of the property in June 2012.  Adam wishes to allocate $150,000 as a non-concessional contribution to his member's account in June 2012 and have the remaining $450,000 allocated to a contribution reserve.

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This amount ($450,000) will then be allocated to his member's account by 28 July 2012 as a non-concessional contribution.

Industry view

Many industry participants believe the legislative provisions in this example have been satisfied as long as the amount retained in the fund contribution reserve is subsequently transferred to the member's account (as a non-concessional contribution in this case study) within 28 days after the end of the month in which the contribution was received (SIS Regulation 7.08(2)).

Accordingly, Adam has been able to contribute the whole commercial property to his SMSF.

ATO initial response

The ATO says Regulation 7.04(3) prohibits a fund from accepting a fund capped contribution in excess of $450,000 (in the case of a member aged 64 or less on 1 July of the financial year) or $150,000 (if the member is 65 but less than 75 on 1 July) in a financial year in respect of a member.

The ATO has previously outlined this logic in ATO Interpretative Decision ATO ID 2008/90. In that decision, the ATO poses the question - "Is a trustee of a self-managed superannuation fund required by subregulations 7.04(3) and 7.04(4) of the Superannuation Industry (Supervision) Regulations 1994 (SISR) to return the whole of a fund-capped contribution to a contributor if it is greater than three times the amount of the non-concessional contributions cap for that financial year?"

An example is then provided - a person, aged 55 years is a member of his self-managed superannuation fund (ABC Fund).

During the 2007-08 financial year the member made a contribution to ABC Fund by transferring an amount from his overseas bank account.

After conversion to Australian dollars, the amount of the contribution was $452,000.  

The full amount of the contribution was a non-concessional contribution.

The member, in his capacity as trustee of ABC Fund, has asked whether the fund has to return the full amount of the contribution or only $2,000, being the amount by which the contribution exceeds three times the non-concessional contributions cap?

Subregulation 7.04(4) of the SISR provides that:

"If a regulated superannuation fund receives an amount that is inconsistent with subregulation ... (3):

(a) the fund must return the amount to the entity or the person that paid the amount within 30 days of becoming aware that the amount was received in a manner that is inconsistent with subregulation ... (3) ..."

It has been suggested that subregulation 7.04(4) of the SISR requires the full amount of a fund-capped contribution that exceeds the relevant amount to be returned to the entity or person who made the contribution.  

However, it is only the amount in excess of the relevant amount that has been received in a manner that is inconsistent with subregulation 7.04(3) of the SISR. 

Item 80 of the Explanatory Statement to the Superannuation Industry (Supervision) Amendment Regulation 2007 (No.1) supports the view that it is only the amount in excess of the relevant amount that is required to be returned. It states: 

"To help prevent a person from inadvertently contributing more than the non-concessional contributions cap, new subregulation 7.04(3) provides that superannuation funds will be required to return an amount of certain member contributions that exceed the cap ..."

In this case, the amount of $2,000 is required to be returned to the member as $2,000 is the amount that the contribution of $452,000 exceeds three times the non-concessional contribution cap for the 2007-2008 financial year of $450,000.

The ATO states in the NTLG minutes that an intention of the trustee to allocate part of the value of the property to the member's account at different times (across financial years) within the time limits set by regulation 7.08 of the SISR does not override the prohibition in subregulation 7.04(3) on the fund accepting the property as a contribution.

Therefore, it is important for SMSF trustees to understand the contribution rules prior to making an in-specie contribution of an asset such as business real property.

If a contribution is above a member's fund capped contribution limit the excess must be refunded to the contributor.

In our example, Adam's fund would have to refund $150,000 of the $600,000 contribution (the $450,000 non-concessional contribution would be within his fund capped contribution) as the asset has been transferred as a single contribution for the purposes of subregulation 7.04(3) of the SISR.

An alternate course of action may have been a partial in-specie transfer of an interest in the property in one financial year, then the remainder transferred in the subsequent financial year.

This way both contributions received by the fund can be accepted by the trustee as they satisfy the requirements of subregulation 7.04(3) of the SISR.

Nicholas Ali is the technical services specialist from Super Concepts.