HomeFree weekly newsletterFree newsletter archiveContact usLogin
Self Managed Super Fund (SMSF) Article
Facts Shed Light on Better Super
By Tony Negline.
This article may be out of date.
26th July 2006
Recently the government provided some further detail about how the new super rules might work.
Six fact sheets have been made available on Treasury's Simpler Super website (www.simplersuper.treasury.gov.au). The most important information provided is further specifics on how the restrictions on undeducted contributions will work.
You will re-call that the government wants to limit the amount of undeducted contributions in any financial year to no more than $150,000. But to cater for large one-off contributions an investor will be allowed to contribute three financial years of contributions (that is, $450,000) in advance.
The initial information that the government provided about these new rules raised more questions than it answered. For example if a person contributed above $150,000 but less than $450,000 in undeducted contributions during a financial year it was unclear if anymore undeducted contributions could be made until three financial years have elapsed. It is good that, bit-by-bit, we are receiving some clarity.
The latest Treasury information shows that if someone contributed between $150,000 and $450,000 during the 2006/07 financial year, they would be limited to $450,000 less the initial contribution over the next two financial years. For example suppose that someone contributed $250,000 in 2006/07 a financial year then they would be limited to $200,000 during 2007/08 and 2008/09. This $200,000 could be contributed in one go or $100,000 per annum.
The government has also clarified how it wants older investors to satisfy a work test before they can make undeducted contributions in advance.
A person who is age 64 would be able to take advantage of the large undeducted contributions made in one go provided they satisfy the work test in the years that they are 65. For example a person who makes a $450,000 contribution at age 64 would need to satisfy the work test in the financial years they are 65 and 66.
This work test requires a person to work for at least 40 hours in less than thirty days. If an investor were to fail this work test in the relevant financial year then the portion of undeducted contributions would have to be refunded and the notional earnings on those contributions would be taxed at the highest marginal tax rate.
Under the government’s new super proposals, a person would not be allowed to contribute to super beyond age 75. This means that a person aged 74 would not be able to contribute undeducted contributions for future financial years as they do not have an entitlement to make contributions from age 75.
Finally a note about trust deeds and the need to amend them. Since the government announced the super changes we have received many questions about when a Self Managed Super Funds should upgrade their trust deeds. It is very important that a fund has a current trust deed because if a specific rule is not in a trust deed then you might not be able to do it.
For example under the government’s latest proposals it is possible for a person to keep their money in the accumulation phase for as long as they want. That is, it will never be necessary to take a lump sum or pension regardless of a person’s age. But if your SMSF trust deed doesn’t allow for this greater flexibility should you follow government announcements or your trust deed?
Some trustees may prefer not to buy a new deed and rely on their trust deed’s ‘deeming’ clause (in our experience all SMSF deeds have this type of clause). The purpose of a deeming clause is to put all the super laws into a trust deed when a law is not specifically reflected in a trust deed.
On the surface this seems to be a practical and simple solution. It is also a solution which is less costly than buying another trust deed.
The fact is however that this solution is dangerous. We all know that the super and tax laws change often. Any trustee who wants to rely on that rapidly changing law without updating their deed would need to make sure that they kept copies of the relevant sections of the law every time they used a rule that was in the super laws but was not specifically catered for in their trust deed.
Why do you need to keep copies of the relevant law? It is a legal requirement that trustees keep all necessary records which justify why their fund has been run in a certain fashion.
If a trustee doesn’t have a copy of all relevant laws they relied upon then how would a trustee defend their actions? Sure past copies of many government laws are available at some university libraries and even on the Internet but you have to know where to go and also what you are looking for. For novices this can be a daunting experience which would require many hours of background research. (Even many experts do not know how specific provisions inter-relate with one another.)
Ultimately it may be easier to amend a trust deed to do anything that is allowed by the law but is not specifically in the deed. The hard question however is to know what your deed should say when you are using rules which aren’t law.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.