A senior superannuation executive has confirmed non-concessional contributions can be ignored with regard to the calculation of earnings for the proposed Division 296 tax due to the role an individual’s total super balance has when they are looking to put money into their SMSF.
Under the proposed rules as to how members determine their Division 296 tax liability, contributions must be deducted in the earnings calculation.
“A lot of you might be looking at and thinking automatically [about] non-concessional contributions. No [this is incorrect because] we’re dealing with people with [total super] balances up and around $3 million here,” Colonial First State head of technical services Craig Day noted.
“Remember our non-concessional contributions cap for a person with a total super balance over $2 million from 1 July this year will have a non-concessional contributions cap next year of nil.”
With regard to such items having to be deducted from the Division 296 tax liability equation, Day pointed out advisers and trustees should just focus on transactions involving concessional contributions, downsizer contributions and small business capital gains tax contributions.
He also took the opportunity to highlight the difficulty allocations from reserves could play in the process of determining the impost.
“It’s really important to note it’s only reserve allocations that count towards [an SMSF member’s] concessional [contributions] cap [that can be deducted from the earnings calculation],” he said.
“If you have a reserve allocation that doesn’t count towards the concessional or non-concessional [contributions] caps, then in that situation those amounts won’t be treated as contributions and will not be deducted back out [for Division 296 tax purposes].
“So a reserve allocation could actually look like earnings and be subject to taxation.”
He acknowledged this treatment of reserves could be problematic for SMSF trustees looking to allocate existing reserves relating to a legacy pension back to the original recipient under the five-year amnesty allowing these types of income streams to be commuted.
This is because reserve allocations of this nature will not count towards any contributions cap and therefore will not be a deductible element in the Division 296 tax calculation.
“If we [allocate legacy pension reserves] after 1 July this year, if the [introduction of the Division 296 tax] is not deferred, then that will look like earnings,” Day said.
“So we’re left in kind of an unenviable position because if you wanted to avoid that situation, you really should be commuting that [legacy] pension and getting those reserves allocated before 30 June.
“But we don’t actually have law yet so we’re left to doing things in the [expectation] these laws come through.”
