When the Federal government first introduced the legal structure of a Self Managed Superannuation Fund (SMSF) into the Superannuation Law on 8 October 1999, it was mainly intended for family members who operated small businesses together. Due to the Superannuation Guarantee Law requiring all employers to provide the minimum level of superannuation support (currently 9.5% of an employee’s wages) for their eligible employees, it was thought that SMSFs could be used to accept employer superannuation contributions for family member employees.
The growth of SMSFs have over the years has no doubt exceeded government expectations. Based on the Tax Office’s statistics there are over 600,000 SMSFs in Australia. Although the sole purpose of a superannuation fund is to generate retirement savings for its members or their dependents, a lot of people use their SMSF to pass on assets to their children.
For this reason I am often asked if an SMSF receive gifts.
The answer lies within the superannuation law.
Under the superannuation law, the way an SMSF can receive gifts is via contributions. A contribution can be made to an SMSF either in cash or using an asset (i.e. an in-specie contribution). There are contribution caps that need to be considered. The caps are $25,000 per annum for concessional contributions and $100,000 per annum or $300,000 (using the two year bring forward caps) for non-concessional contributions.
The Tax Office’s interpretation of a contribution is anything of value that increases the capital of a superannuation fund, made by a person for the benefit of one or more members of the fund (refer to Tax Ruling 2010/1). This means, if a gift is transferred into an SMSF, it will increase the capital of the SMSF and as a result a contribution will have been made.
As to which contributions caps the gift will be counted against will depend on who made the gift.
If the gift is made directly by an SMSF member, then it can be treated as a member’s personal contribution. The market value of the gift will be recorded as a non-concessional contribution and counted towards the member’s non-concessional contributions cap. This is unless the member decides to claim an income tax deduction on the contribution. If a tax deduction is claimed, then the gift will be recorded as concessional contributions and counted towards the member’s concessional contributions cap.
If the gift is made by a member’s spouse, then it can be treated as a contribution for the receiving spouse and counted towards the receiving spouse’s non-concessional contribution cap. The contributing spouse may also be entitled to a tax offset on the contribution if other eligibility criteria are met.
If, however, the gift is made directly by anyone else such as a parent, then it will be treated as a concessional contribution and count towards the member’s concessional contributions cap.
The member for whom the gift is being made for will also need to meet the part time work test (i.e. 40 hours over 30 consecutive days) if they are aged sixty-five (65) or over. The age and work status of the person making the gift does not matter. In addition, members aged seventy-five (75) and over cannot receive any gifts in their SMSF. This is because, only mandated employer contributions can be received for members aged seventy-five (75) and over.
SMSF members need to be careful if gifts are made from a family trust of a family company. These gifts will also be treated as concessional contributions and count towards the member’s concessional contributions cap. This is unless the member can prove that the gifts were made by them due to their entitlements as a beneficiary of the trust or a shareholder of the company.
The superannuation law only permits listed shares owned by members to be contributed into their SMSF. Therefore, if an unlisted share owned by a member is gifted into the member’s SMSF, it will amount to a contravention of the superannuation law.
Gifts made by a discretionary trust or a private company may also be treated as non-arm’s length income when received by the member’s SMSF. This means, the SMSF may need to pay forty-five per cent (45%) tax on the non-arm’s length income.
Receiving gifts can be great, but SMSF members must consider the contribution standards, contributions caps, non-arm’s length income costs, and the acquisition of assets from related parties in receiving gifts.