Avoiding excess contributions to an SMSF when transferring shares
With the window seemingly coming to a close with in-specie contributions of listed shares into SMSFs, it is a timely reminder to ensure that your contribution strategy is in place to avoid any excess contributions.
The strategy of in-specie contributions of listed shares into a self-managed super fund (SMSF) has been a popular one for many years.
This strategy, however, appears likely to cease from 1 July 2013, when the Stronger Super recommendation to prohibit such transfers where an underlying market exists will take effect.
This will require any shares to be bought and sold on that underlying market.
Where an individual makes an in-specie contribution, the market value of the listed share will count as either a non-concessional or concessional contribution.
There has been a query for some time whether a portfolio of shares transferred into a SMSF on the same day is classified as a 'single' contribution, or whether each parcel of shares is a contribution in its own right.
Recently released ATOID 2012/79 considers this matter in the context of whether a portfolio of shares transferred in-specie to a self-managed super fund would be a 'fund-capped' contribution as defined in sub-regulation SISR 7.04(7).
Subject to how the Commissioner would view such same-day contributions would ultimately decide whether an amount:
- Could be subject to excess contributions tax, where it is greater than the individual's respective contribution caps; or
- Would be fund-capped and therefore the excessive non-concessional amount cannot be received by the fund and must be returned in accordance with sub-regulation 7.04(4) of SISR (not subject to excess contributions tax).
To understand this further, let's consider the following example.
Example
Ken, aged 65 at the commencement of the 2011/12 financial year, is a member of the Ken & Barbie SMSF.
He was gainfully employed within the meaning of sub-regulation 7.01(3) of the SIS Regulations for that financial year and was eligible to contribute to the SMSF.
Ken had a non-concessional contributions cap of $150,000 for the 2011-12 financial year for the purposes of both subsection 292-85(2) of the Income Tax Assessment Act 1997 (ITAA 1997) and the definition of 'fund-capped contributions' in sub-regulation 7.04(7) of the SISR.
On 8 February 2012, Ken contributed the following parcels of shares in three different listed companies to the SMSF:
- 2000 shares in ABC Ltd - total market value $42,000
- 5500 shares in DEF Ltd - total market value $78,000
- 3200 shares in XYZ Ltd - total market value $35,000
The total market value of the listed shares is $155,000. The question is whether each share is a single contribution or whether the total contribution of the listed shares made on the same day counts as a single contribution?
The Commissioner's decision within ATOID 2012/79 is that each parcel of listed shares is a separate contribution.
A couple of important factors lead the Commissioner to conclude that the above amounts do not constitute being 'fund-capped'.
Firstly, the Commissioner refers to ATO ID 2007/225 which considered the acceptance of fund-capped contributions by a SMSF.
In this interpretative decision, it is the Commissioner's view that sub-regulation 7.04(3) of the SISR applies on a 'contribution by contribution' basis.
This principle applies irrespective of the form in which the contribution is made, whether this is cash or property contributed in-specie. This includes the transfer of listed shares.
Secondly, each of the shares are in different companies, or shares in a single company that are of a different class.
As such they are attended by disparate legal and/or beneficial rights and therefore cannot be interchanged or substituted.
The resulting decision of ATOID 2012/79 with the example is that Ken would have breached his non-concessional contribution cap by $5,000 and would be subject to excess contributions tax.
With the window seemingly coming to a close with in-specie contributions of listed shares into SMSFs, it is a timely reminder to ensure that your contribution strategy is in place to avoid any excess contributions.
Aaron Dunn is the managing director of The SMSF Academy.
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