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Self Managed Super Fund (SMSF) Article
How co-contrbutions can add to your retirement nest egg
By Tony Negline.
This article may be out of date.
15th September 2004
Everyone who earns less than a moderate income per year must consider how to take advantage of the Government’s superannuation co-contribution.
The co-contribution has the capacity to considerably increase someone’s retirement benefit. Lower income earners, especially spouses of higher income earners, with a capacity to structure their tax affairs should seek to get this additional benefit.
The Australian Taxation Office administers the payment of the co-ontribution and the basic point of the scheme is that the ATO will make those contributions to a fund if a superannuation investor satisfies certain requirements.
Investors who want the ATO to contribute to their Self Managed Super Funds must make sure of some important points.
The super laws demand that a SMSF trustee act prudently. It may be unwise for a trustee to accept a Government co-contribution without first checking to see that the fund’s trust deed allows the acceptance of these contributions.
It is almost impossible to make generalised statements about SMSF trust deeds because there is such a wide variety of documents. Even trust deeds supplied over a number of years by one law firm will vary greatly.
However it is a fair bet that most trust deeds which are more than twelve months old do not allow for the Government co-contribution. I checked our trust deed, which we purchased in early July 2003 and the Government co-contribution is not expressly in the deed. Even trusts deeds which have been purchased in the last six months may not specifically allow for the co-contribution.
Some trustees may want to accept the co-contribution and rather than buy a new deed they want to rely on their trust deed’s ‘deeming’ 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. Nearly all SMSF trust deeds will have these clauses.
On the surface this seems to be a practical and simple solution especially in relation to the co-contribution. It is also a solution which is less costly than buying another trust deed.
But this solution is dangerous. We all know that the super 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.
Any trustee who wants to accept the Government’s co-contribution will need to have administration procedures in place to accept the contribution into their bank account via direct debit. Further the contribution must be correctly recorded against the relevant member’s account as an undeducted contribution and will form part of the member’s Preserved Benefits. (The fund should record that the contribution has not been made by the member but has been made by the government and this should be reported to the member on their annual statement.)
It is possible that part of the co-contribution may need to be refunded to the ATO if at some later stage the ATO determines that it has overpaid an amount so trustees should be ready to perform this necessary administration.
A trustee must also make sure that they have recorded the co-contribution as being part of a member’s minimum benefits. Also any earnings on the co-contribution are also minimum benefits.
The ALP announced last week that it intends to get rid of the co-contribution if they win on 11 November. Only time will tell if they are true to their word. By way of comparison, before the Coalition won the 1996 election they took every opportunity to vote against the Super Guarantee in Parliament and from time-to-time threatened to unwind it once they returned to the Treasury benches. In Government the Coalition has never done anything to get rid of it over the last eight years.
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