New SMSFs - Initial contribution for members over the age of 65

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Courtesy of SuperCentral. Original article here.

One of the practical difficulties of setting up an SMSF for those over 65 has now been solved by the ATO.  The chicken (or the egg, if you prefer) in this case is the fact that the SMSF must be “registered” before rollovers can be received by the SMSF.   And to be registered the SMSF must have received at least one contribution.  But you cannot make a contribution if you are over age 65 and have not satisfied the “40 hours/30 consecutive days” rule so the SMSF cannot be set up. It’s a conundrum! A puzzlement!

The ATO has resolved this chicken and egg issue by means of an administrative concession.

The ATO has advised that if the member makes a nominal contribution (say $10) solely for the purpose of establishing the SMSF, the ATO will disregard the fact that a contribution has been accepted contrary to the SIS contribution acceptance rules.  

Trustees will be able to self-assess their entitlement to this administrative discretion so long as the contribution is in fact nominal (possibly $100 would be the upper limit): the contribution was in fact made for the sole purpose of establishing the SMSF: and, before the end of the financial year in which the fund is established, one or more legitimate contributions or rollovers have been made.

How much is a nominal contribution?  We would recommend $10.  However if the SMSF is established in either Tasmania or the Northern Territory we would recommend $60 and $30 respectively.  The reason being, is that in Tasmania duty of $50 is imposed on deeds establishing super funds.  By making an initial contribution of $60 there will be sufficient funds to pay the duty and still have $10 left over.  A similar reasoning applies to funds established in the Northern Territory although the duty is $20 and not $50.

What do you do with the nominal contribution?  The nominal contribution (after payment of duty in the cases of Tasmania and the Northern Territory) cannot be deposited to a bank account (as the fund at this stage has not been registered and does not have an ABN – so cannot open a bank account).  The nominal contribution should be physically retained as cash on hand which can be eventually banked in due course.

What if the conditions for the concession are not satisfied?  As with any administrative concession there must be strict compliance with the conditions.  The failure to make a legitimate contribution or rollover before the end of the financial year might occur if the SMSF is established late in the financial year – such as in June.  In this case either set up the SMSF in July or set up the SMSF with another member who can make a legitimate contribution at the time trust deeds are being signed.

Will the nominal contribution be reportable as a non-concessional contribution?  Could the nominal contribution give rise to excess non-concessional contributions tax issues?   Strictly, the nominal contribution is a non-concessional contribution and must be reported.  However, recent changes to the contribution rules have greatly reduced the adverse tax implications of exceeding the non-concessional contributions cap, so this may not be an issue.  The ATO has in the past ignored minor breaches where the non-concessional contribution cap has been exceeded by a nominal amount. It is highly likely that the ATO would take no action if the nominal contribution caused the non-concessional contributions cap to be exceed by $10 or $30.

Why does this problem only affect those over age 65?  The problem does not apply to individuals under age 65 – simply because their rights to make super contributions are not restricted compared with individuals over 65 and those contribution rights are almost entirely removed for individuals over age 75.

Does this administrative concession solve all problems which may arise when setting up SMSFs?Very emphatically no.  This concession does not solve any problems which arise where individual trustees each witness the other’s signature.  Far more significantly it does not solve the problem of SMSFs failing to be registered with the ATO, registering more than 60 days after the SMSF has been set up or registering the fund before the fund has been established.

If an SMSF is not registered with the ATO it cannot be a regulated superannuation fund and therefore, cannot be a complying fund.  Further, the fund’s name will not be entered into the Super Fund look up website and so other funds will not action benefit rollover requests naming the fund.

If an SMSF is registered more than 60 days after being set up, the SMSF will not (unless the ATO exercises its discretion) be a complying superannuation fund in respect of the financial year in which it is established.  The SMSF may be a complying superannuation fund for later financial years.

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