Most people with a SMSF are looking for greater control over their investments and often look at it as a way to invest in conjunction with their place of work. The most common form of this is for their Fund to own the business premises that they work from. However, there are many clients who may also have the opportunity to invest in the business itself.

Let’s assume that you have a client who is looking to purchase a business through a company structure with three other individuals. All four will be directors and equal shareholders of the business.

So, can your client have its SMSF purchase shares in the company? We know that a SMSF cannot intentionally acquire this asset from a related party of the Fund. So therefore, the company will need to be one that is purchased from a third party. But because your client will be working in the business and a director of the business with his three associates, will it contravene the in-house asset rules?

In this case, we need to determine if this is an investment in a related party of the fund. So what is a related party of the fund? A related party of the fund includes a member of the fund, a standard employer-sponsor of the fund or a part 8 associate of either of the aforementioned entities.

The fund is not investing your client, so the ownership of shares is not an investment in a member of the fund. Also, assuming that the company does not, or will not, contribute to the fund pursuant to an arrangement between the employer and the trustee of the fund, then the company is not a standard employer-sponsor of the fund either. It is possible that the employer would contribute to the fund based on an arrangement between the employer and the member; however this does not cause the employer to be a standard employer-sponsor. It is important not to confuse the definition of employer-sponsor (one who simply contributes to the fund) and standard employer-sponsor (contributes to the fund based on an arrangement with the fund).

The next thing to look at is if the investment in the company is an investment in a part 8 associate of either a member of the fund or a standard employer-sponsor of the fund. For the purposes of this case, we will assume that the fund has no standard-employer sponsors, which is likely given the circumstances set out above. Therefore, we need to determine if the company is a part 8 associate of a member of the fund.

A part 8 associate includes a relative of the client, another member of the fund, the trustee or director of the corporate trustee of the fund,  a partner of the client or a partnership in which the client is a partner, or a spouse or child of the partner, a trustee of a trust where the client controls the trust, a company that is sufficiently influenced by, or which a majority voting interest is held by the client, or another entity that is a part 8 associate of the client or two or more of the entities listed in this paragraph.

This can sound confusing. However, we specifically need to focus on the underlined text above because the investment is in a company. Assuming that the other three shareholders are not relatives, partners in a partnership with the client or related to the client through interposed entities and that each equal shareholding also provides equal voting rights, then we can conclude that the client, together with any a part 8 associates, does not have majority voting rights in the company, as the clients voting rights equals less than 50%.

All that’s left to do now is define ‘sufficiently influenced by’. This term is not specifically defined, but if the majority of the directors are accustomed or under an obligation (formal or informal), or might reasonably be expected to act in accordance with the directions of your client (directly or indirectly), then it is likely that your client sufficiently influences the company. However, in the case where all directors have equal say in relation to the decisions of the company and your client is not the ‘leader’ or ‘head’ of the directors, then it is unlikely that your client sufficiently influences the company.

This opens up great investment opportunities for trustees of SMSF’s who would like to invest in companies that fit within the investment strategy of the fund, are expected to provide sound returns for members and may require a handful of experienced acquaintances to operate to company.

Warrick Hanley, Chairman SMSF Education

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There are contribution caps that determine the maximum amount that can be contributed in any one year for each type of contribution.

A Concessional contribution is a contribution made to superannuation where a tax deduction has been claimed. This includes contributions such as the Superannuation Guarantee Charge (SGC), salary sacrifice and personal deductible contributions. Concessional contributions incur contributions tax of 15% upon entering superannuation. From 1 July 2012, this contributions tax increases to 30% on Concessional contributions for individuals with an income greater than $300,000.

The maximum Concessional contribution that can be made into the account of a superannuation member is dependant on their age. Currently, a member under the age of 50 is able to have contributions of up to $25,000 made to their account as a Concessional contribution in any one year. For those over age 50, the cap is $50,000.

However, as of 1 July 2012, the Concessional contribution cap will be a universal $25,000 for all members regardless of age. In saying this, the Government has announced that members over age 50 will be able to have up to $50,000 (potentially $55,000 due to indexation) contributed to their accounts as a Concessional contribution from 1 July 2014 if their superannuation member balance is below $500,000.

A ‘non-concessional’ contribution is a contribution made to superannuation with after-tax dollars – where income tax has already been paid. No tax is incurred on this type of contribution upon entering superannuation.

The maximum Non-Concessional contribution that can be made in any one year is $150,000. However, members under the age of 65 have the ability to ‘bring forward’ two years’ worth of the Non-Concessional cap.

This means that up to $450,000 may be contributed in any one year, with no further Non-Concessional contributions being made for the following two years. The ‘bring forward’ rule is triggered in a financial year if more than $150,000 is contributed as a Non-Concessional contribution.

Exceeding the Cap
Where a member receives Concessional contributions in excess of their relevant cap, the excess amount is subject to excess contributions tax of 31.5% and the amount in excess will then count towards their Non-Concessional cap.

For various reasons, many individuals have been incurring excess contributions tax as a result of circumstances out of their control. From the 2012 financial year, new measures in place provide certain individuals with the ability to have excess contributions refunded to them and taxed at their marginal tax rate, so as not to incur excess contributions tax.

However, this is only available in limited circumstances where the excess contributions equal less than $10,000 and there are no excess contributions for an earlier financial year (excluding years prior to 2012). This option for a refund is only available once for each individual’s lifetime. It is not available in the years subsequent to a refund being claimed.

In cases where the Non-Concessional contributions cap is exceeded, excess contributions tax of 46.5% is incurred. This is after income tax has already been paid on the amount contributed.

There are some instances where 93% in tax on contributions could be payable. This occurs when the Non-Concessional contribution cap has been reached and a Concessional contribution is made, which causes the Concessional contribution cap to be exceeded. In this case, the concessional contribution will incur contributions tax of 15% and then excess contributions tax of 31.5% for exceeding the Concessional contribution cap.

Because the contribution has exceeded the Concessional cap, it will count towards the Non-Concessional cap. However, because the Non-Concessional cap had already been reached, excess contributions tax of 46.5% will be payable for exceeding the Non-Concessional cap – totalling 93% in excess contributions tax.

Contribution caps for relevant years (excluding indexation):

Ideally, all contributions should be made to your superannuation account a couple of weeks prior to the end of the financial year. The end of the tax year is a hectic time for superannuation funds. By getting your contributions in early, it should ensure that any delays in transaction or processing time will not affect your ability to claim a tax deduction in the current financial year.

For more information, please go to www.smsfeducation.com.au

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