Conventional contributions caps have experienced significant shrinkage over the past few years and this trend is set to continue if a Labor government is voted in this year. Liz Westover takes a look at some other contributions advisers should keep in mind for their clients.
With lower contribution caps, thresholds and heightened restrictions on contributing to superannuation, advisers need to be aware of all options available to maximise the amount individuals can contribute to their superannuation over time.
While there are clearly opportunities and strategies for maximising contributions using traditional concessional and non-concessional contributions, there are other ways of getting money into super. Not all of these other contribution types will be available to everyone or at all times. But it is important to be able to identify an opportunity when it arises and determine how it can be used to assist in maximising retirement savings.
The downsizer contributions and the first home super saver scheme are two more recent examples of other types of contributions that can be made. However, two other ways of contributing to super are the subject of this article and they are using the proceeds from small business capital gains tax (CGT) concessions and structured settlement payments.
Small business CGT concessions
Many small business owners are reluctant to contribute to their superannuation funds during their working lives other than amounts they may be obliged to contribute as a result of the super guarantee provisions. Instead, additional funding tends to be channelled back into growing their businesses. Many view their businesses as their own form of superannuation or retirement savings. In recognition of this, the government provides generous concessions to them upon the sale of their businesses, including the ability to contribute the proceeds of the sale to their superannuation funds. These types of contributions can be subject to certain limits but not the normal limits that apply to concessional and non-concessional contributions. Further, they are not subject to the total superannuation balance restrictions that would apply to normal types of contributions.
As with most transactions involving superannuation funds, care needs to be taken to ensure the relevant criteria are met before making the contribution. Significantly, the receiving super fund must be notified that contributions are being made under these concessions. The ATO provides the approved Capital Gains Tax Cap Election form for these purposes. Lodgement of this form with the super fund that will receive the contribution will prevent the contribution from being treated as a non-concessional one. The form must be lodged before or at the time of the contribution.
It is worth noting also these types of contributions are subject to the age-based tests that apply in relation to a superannuation fund being able to accept any type of contribution. Some exceptions do apply, however, in relation to earn-out rights that may accompany the sale of the CGT asset.
While there are clearly opportunities and strategies for maximising contributions using traditional concessional and non-concessional contributions, there are other ways of getting money into super.
The scope of this article is not to discuss the relevant criteria for access to small business CGT concessions, but rather, once satisfied, discuss how and when these amounts may be contributed to super.
There are four types of small business CGT concessions available. These are:
- small business 15-year exemption,
- small business 50 per cent reduction,
- small business retirement exemption, and
- small business rollover.
- Amounts subject to the 15-year exemption and the retirement exemption provisions can be contributed to superannuation.
Contributing amounts as a result of the 15-year exemption
Where a CGT asset that has been held for more than 15 years is sold and the relevant exemptions applied, the small business owner is able to contribute the capital proceeds from the sale of that asset to superannuation. The amount contributed must not exceed the lifetime CGT cap amount. For the 2019 financial year, the cap amount is $1.48 million (indexed annually).
The contribution needs to be made by the latter of the due date of lodgement of the individual’s tax return for the year of the CGT event or 30 days after the receipt of the proceeds.
Where the capital gain is made by a company or trust, a contribution can still be made by the individual under these provisions if the following conditions are met:
- the individual was a CGT concession stakeholder,
- the company or trust pays the individual within two years of the CGT event,
- the contribution is no more than the shareholders’ entitled percentage of the proceeds, and
- the contribution is made to the super fund within 30 days of the payment from the company or trust.
Small business retirement exemption
Contributions under the retirement exemption are subject to the CGT-exempt lifetime cap of $500,000 (this amount is not indexed). The amount of the contribution is limited to the lesser of the amount of the disregarded gain and the $500,000 cap. It is worth noting the distinction in allowable contributions from the 15-year exemption above. Where the 15-year exemption allows the capital proceeds to be contributed, the contributions under the retirement exemption can only be made from the exempt or disregarded gain, up to the cap.
Where an individual claiming the retirement exemption is under 55, they must contribute the amount (up to the cap) to superannuation. Individuals over the age of 55 may contribute to super.
If an individual is making the contribution, it generally needs to be paid at the latter of the time the choice for the exemption is made, or on receipt of proceeds. Where the payment is being made directly from a company or trust, the contribution must generally be made by the latter of seven days from making the choice and receipt of capital proceeds.
Contributions under the retirement exemption do not count towards the non-concessional contributions cap. Further, the contributions will be treated as a personal contribution of the individual even if contributed by a company or trust.
Can a contribution under the small business CGT concessions be made by way of an in-specie transfer of an asset?
While it is possible to make in-specie contributions to superannuation and still access the small business CGT exemptions, care needs to be exercised when determining which asset is to be contributed.
The ATO has determined in ATO Interpretive Decision ID 210/217 the contribution of an asset (separate from the asset that is the subject of the CGT asset exemptions) is allowable. That is, the contribution does not have to be a cash payment and another asset can be used to make an in-specie contribution. However, the ATO appears to hold the view the asset that is the subject of the CGT event for which concessions are being sought cannot be contributed to superannuation in specie. This has been demonstrated in a number of private binding rulings issued by it on this matter.
Note also, as with any in-specie contribution to a superannuation fund, the asset being contributed must be an asset that is an allowable acquisition by a super fund under relevant superannuation legislation.
Timing of small business CGT concession contributions and other contributions
While contributions under the small business CGT concessions are not subject to any restrictions by virtue of the individual’s total superannuation balance, once they are contributed, they will count towards the total superannuation balance. Therefore, if an individual intends to make additional contributions (for example, non-concessional contributions), they should consider making those contributions first and then amounts under the small business CGT exemptions second. Depending on the timing of contributions, making the exempted contributions first may prohibit the making of non-concessional contributions later if the individual’s total superannuation balance exceeds the $1.6 million threshold as a result.
Structured settlement contributions
While this is not the way you hope to be making contributions to super, those unfortunate enough to suffer some form of personal injury may wish to contribute what they can from compensation claims arising from their injury to their super fund. This will enable those funds to be subject to the concessional tax environment afforded by superannuation on an ongoing basis.
There are a number of criteria that must be met in order to be able to make the contribution under the relevant provisions.
Firstly, the amount being contributed must be as a result of a settlement of claim or a court order for compensation from a personal injury of the individual. The amount must be contributed within 90 days of receipt of the payment, agreement or court order, although a longer period may be allowed by the tax commissioner.
Further, the individual must have certification from two legally qualified medical practitioners that, because of the injury sustained, they are never likely to return to gainful employment in a capacity for which they are reasonably qualified.
Finally, the super fund receiving the contribution must be notified of the nature and type of contribution. This must be done no later than the time of the contribution and will enable the super fund to treat it appropriately. Failure to notify the fund in the correct time frame and in the approved form can result in the contribution being ineligible for concessional treatment. Accordingly, it can result in the amount being treated as a non-concessional contribution and becoming subject to excess non-concessional contribution provisions.
It is important to note structured settlement amounts are specifically exempted from the definition of a non-concessional contribution. They do not count towards an individual’s total superannuation balance and can be made regardless of an individual’s total superannuation balance. As such, even if an individual had more than $1.6 million in superannuation, they could still make these types of contributions. Further, if an individual wanted to make future non-concessional contributions, the structured settlement contribution would be deducted from their superannuation balance to determine their total superannuation balance for the purposes of assessing their eligibility to make those contributions.
The ATO’s “Law Companion Ruling LCR 2016/12 – Superannuation reform: total superannuation balance” provides further detail on how structured settlements are removed from the total superannuation balance calculation together with some specific examples.
There is no limit on the amount of a contribution that can be made where it arises from a structured settlement from a personal injury.
Making other contributions
While the above provides an overview of some of the key features of making contributions to superannuation under the small business CGT concession provisions and from proceeds of personal injury settlements, a thorough analysis of the specific circumstances of individuals must be considered and applied against the relevant legislative provisions. While the concessions are generous and afford an opportunity to maximise superannuation balances that are subject to concessional tax treatment, the conditions and criteria must be carefully obeyed to ensure individuals remain eligible.