It would be something of an understatement to say that a spanner has been thrown in the works with the just-announced government plan to set a lifetime cap of $500,000 on non-concessional contributions. So your SMSF trustee clients now have a $500,000 conundrum.
The measure is not yet law, and there is no certainty it will be implemented, given that the looming federal election is no sure-thing. And if the present government is re-elected there is still the possibility that details, such as the effective date as well as retrospectivity, could end up being modified in the proposal’s ultimate passage through a new parliament.
(And regarding the latter, who knows what the final make-up of both houses will be, or the resulting argy-bargy on all manner of legislation?)
The “facts” as they stand for now however warrant some careful consideration, both for SMSF trustees and their advisers.
The $500,000 lifetime cap, as proposed in the federal budget, is meant to take effect from 7.30pm on May 3, 2016. It is also meant to take into account all such contributions made since July 1, 2007. Although the cap is not yet in force, ignoring this particular budget item could, depending on an SMSF trustee’s circumstances, put them at serious risk of incurring penalties.
Not only that, but advisers who do not take the “new” cap into consideration may also be held liable in the end if the measure does in fact become law. Needless to say of course is that trying to work with essentially incomplete information is not helping.
And just to fill in some of that information, note that in cases where an SMSF trustee exceeded the cap prior to budget night, they will be taken to have already used up their lifetime non-concessional cap but will not be required (as the measure proposes) to withdraw the excess from the superannuation system or pay any penalty tax on this pre-Budget excess.
However where exceeding the cap occurs after the budget night commencement, they will be required by the ATO to take this excess out of their fund or face stiff penalties for not doing so.
Another sting of the lifetime cap is the inability to make non-concessional contributions in order to remedy breaches of the superannuation rules or to achieve flexibility in managing the fund.
Some of the situations where the non-concessional contributions could save the day include rearranging the limited recourse borrowing arrangement (LRBA) back on an arm’s length term. This is one of the current ATO’s focus areas.
Trustees have until June 30, 2016 to fix non-compliant LRBAs, and to do that funds are required to pay some part of the borrowing.
Where do you get those funds if the lifetime cap turns out to be completely used up? Moreover, how are the related-party LRBAs going to be fixed now, bar the sale of the underlying asset?
Sounds like the Treasury shot itself in the foot with this one.
Other situations where extra funds could be injected into an SMSF to fix problems include staying below the 5% benchmark for in-house assets, having enough liquid funds to pay pensions, or simply participating in an upcoming IPO when the employer’s contribution is several months away.
In other words, where are the trustees supposed get cash quickly now?
#[Smsf], [smsf trustees], [smsfs], [super professionals], [superannuation]
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