When an SMSF member deposits money into their fund’s bank account, it is treated as the member’s superannuation contribution. When cash is paid from an SMSF’s bank account to a member, the member has received a superannuation benefit. There are, however, legal grey areas where contributions could be made unintentionally and a benefit might not be considered paid when intended.
In Taxation Ruling 2010/1, the ATO states that a ‘contribution’ is anything of value that increases the capital of a superannuation fund, provided by a person whose purpose is to benefit one or more members of the fund or all of the members in general.
It’s a long-winded way of saying that when a member transfers an asset into their SMSF without receiving payment for the asset, that asset should be treated as a contribution. In the same way, if a member pays their SMSF’s expenses without obtaining reimbursement from the fund, the payment could be treated as a contribution as it extinguishes the liability of their SMSF and increases the fund’s capital.
Members need to also be careful when making renovations to properties owned by their SMSF. If the property increases in value as a result of the renovation, it is treated as a contribution and not only the cost of the building materials paid for by the member.
Timing is important
The timing of a contribution is also important as it determines the financial year in which the member can claim it as a tax deduction, as well as whether the member has exceeded their contributions caps in that financial year (under the current rules).
As TR 2010/1 states, the capital of an SMSF is increased when an amount is received, or ownership of an asset is obtained, or the SMSF otherwise obtains the benefit of an amount.
It’s easy to determine that a cash contribution has been made when the SMSF trustee receives the amount. However, when it comes to an asset transfer, a contribution is sometimes made when the SMSF becomes the beneficial owner of the asset rather than the legal owner. Take, for example, a member transferring land to their fund. The relevant transfer form is signed and given to their SMSF trustee on 30 June. The SMSF trustee lodges the form with the State Revenue Office on 15 July and seeks a transfer of title via the Land Title’s Office once duty is paid.
The trustee, by holding a duly executed transfer form and not requiring anything further from the member to perfect its title, possesses everything required to make the transfer of beneficial ownership of the property on 30 June, so a contribution is considered to be made on 30 June. This is provided the SMSF trustee retains sufficient evidence of the relevant transactions and events to identify when the change of beneficial ownership occurred.
Grey areas in benefits
Just as there are some grey areas in super contributions, there are grey areas when paying benefits. An SMSF can, for example, pay a lump sum benefit by transferring an asset to a fund member, whereas an SMSF cannot pay a pension benefit using assets unless the pension is either partially or fully commuted to a lump sum. Not all pensions can be partially commuted – for example, a transition to retirement pension can only be partially commuted if it has an unrestricted non-preserved component. A lump sum super benefit can be paid in any number of instalments, whereas a lump sum death benefit can only be paid in one or two instalments to the deceased’s beneficiaries.
Benefits not permitted via journal entry
While super contributions can be made with journal entries where the member and the SMSF trustee have a present liability or legal obligation to each other and they offset the liabilities against each other using a journal entry in the SMSF’s books, a super benefit cannot be made with a journal entry.
The ATO states in ATOID 2015/23 that a death benefit, for example, must actually be paid to the deceased’s beneficiaries by transfer of cash and/or the ownership of an SMSF’s asset. The payment must reduce a member’s benefit in the SMSF. A transfer to the deceased’s beneficiaries simply by way of journal entries in the books of the SMSF would not satisfy the requirement of the super law that a benefit has been made.
Understanding the basic requirements of what a super contribution is and when a benefit is made can save a member from contravening the superannuation and tax laws. Just remember, a contribution increases the capital of an SMSF while a benefit should reduce it.
Monica Rule is an SMSF specialist and author of The Self-Managed Super Handbook – www.monicarule.com.au. This article is general information and does not consider the needs of any individual.