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Budget Announcements: Super contributions from a small business standpoint.

Super contributions from a small business standpoint.

Scott Morrison’s budget has been received with mixed reactions, but what effect does it have on small business and super?

The small business capital gains concessions in Division 152 of the Income Tax Assessment Act 1997 can be a fruitful tool for those involved in small business that are looking to add a little spice to their super. Whilst these concessions can be a real boon when properly utilized, there is no comment so far on whether their effectiveness will be impeached by Morrison’s new, slightly stingier, super rules.

 A key aspect of the budget was the introduction of a lifetime non-concessional contributions cap of $500,000. The lifetime cap takes into account all non-concessional contributions made on or after 1 July 2007, and will commence at 7:30pm on 3 May 2016. The purpose of this cap, according to the ‘Tax and Super’ Budget overview is to:

“Limit the extent to which the superannuation system can be used for tax minimisation and estate planning. Less than 1% of superannuation fund members have made contributions above this cap since 2007.”

It is important to note that contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed or be subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings and is estimated to have a gain to revenue or $550 million over the forward estimates period.

Other relevant Budgetary Measures:

  • From 1 July 2017 a $1.6 million superannuation transfer balance cap on the total amount of superannuation that an individual can transfer into retirement phase accounts will be introduced.
  • Will require those with combines incomes and superannuation contributions greater than $250,000 to pay 30% tax on their concessional contributions, up from 15%.
  • From 1 July 2017, the superannuation concessional contributions cap will be lowered to $25,000 per annum.
  • The government will also introduce catch-up concessional superannuation spending by allowing unused concessional caps to be carried forward on a rolling basis for up to 5 years for those account balances of $500,000 or less. This will allow those with lower contributions, interrupted work patterns or irregular paying capacity to make ‘catch-up’ payments to boost their superannuation savings.
  • From 2016-17, the unincorporated small business tax discount will be available to businesses with an annual turnover of less than $5 million, up from the current threshold of $2 million, and will be increased to 8%.


Do the new budgetary measures alter the effectiveness of div 152 and small business CGT concessions?

S 292.90 (1) ITAA 1997 states that your non-concessional contributions for a financial year are the sum of:

(a) each contribution under subsection (2)

Subsection (2): a contribution is covered under this subsection if:

(c) it is not any of the following:

(iii) a contribution covered under s 292-100 (certain CGT payments), to the extent that it does not exceed your CGT cap amount when it is made.

Therefore, if the small business CGT concessions are included in section 292.100, they are not covered as a non-concessional contribution, as per the rules of 292.90.

S 292.100 (1) states that a contribution is covered under this subsection if:

(b) the requirement under subsection (2) is met

Subsection (2)(a) the requirement of this subsection is met if the contribution is equal to all or part of the *capital proceeds from a * CGT event for which you can disregard and * capital gain under s152 (or would be able to do so, assuming that a capital gain arose from the event.)

As such it is clear that div 152 small business CGT concessions are not included in the definition of a non concessional contribution, and as such it seems unlikely that they will be included in the $500,000 cap.

There is nothing to suggest that the definition for non concessional contributions will be changed to include div 152 small business capital gain exceptions. We think that these SBC continue to present themselves as a valuable method for those hoping to continue to invest in their super.
 

Posted in: Tax & ATO News Australia at 18 May 16

ATO affirms Bornstein decision

In an earlier blog I discussed the ATO’s reluctance to exercise its discretion to disregard excess superannuation contributions. You may recall that the Administrative Appeals Tribunal has found in favour of the ATO in all cases except two: Bornstein and Longcake. The ATO has now released a Decision Impact Statement in support of the AAT’s decision in Bornstein.

 

Bornstein concerned a taxpayer who was a sole director, shareholder and employee of a small company. At the end of each financial year Mr Bornstein, as ‘employer’, would make a superannuation contribution into his own superannuation fund. While overseas between 21 June and 8 July 2007, Mr Bornstein emailed his accountant to ask whether a superannuation contribution needed to be made prior to 30 June. Mr Bornstein received no response from his accountant, and decided to check the ATO website to see when the contribution could be made.
 
Mr Bornstein found on the website that an employer has up until 28 July to make a compulsory contribution for the previous quarter in accordance with the Superannuation Guarantee Administration Act 1992 (Cth). However, the site did not identify the consequences of such late payment on the employee under the excess contributions regime. Mr Bornstein was not aware of this parallel regime.
 
In reliance on the belief that a payment on 10 July 2007 would relate to the 2007 income year, Mr Bornstein proceeded to make a contribution. In June 2008 Mr Bornstein made a further contribution to his superannuation fund after confirming with his accountant that this was correct.  The ATO later assessed him for excess contributions tax because of the June 2008 payment.
 
Based on the circumstances, Mr Bornstein applied to the Commissioner to exercise his discretion to disregard the resulting excess contributions. However, the Commissioner did not exercise his discretion to do so.
 
On appeal of the decision, the Tribunal held that the Commissioner’s decision should be set aside and that discretion should be exercised in favour of Mr Bornstein. Senior Member McCabe held that special circumstances existed because there was a “‘perfect storm’ of events, miscommunications and misunderstandings”.
 
The Decision Impact Statement released by the ATO affirms this decision, and states that the decision is consistent with its stated view in PS LA 2008/1. In particular, paragraph 37 of PS LA 2008/1 provides that “each individual case will present a unique set of circumstances that need to be considered and weighed up in forming an opinion. It may not be helpful to focus too closely on each particular circumstance and ask whether it is special. Of itself, one particular matter is unlikely to be special for there would be many other individuals in a similar situation. The question is whether, when the relevant circumstances of the individual and the making of the relevant contribution are looked at in their entirety, they may be fairly described as unusual, uncommon or exceptional so as to warrant the exercise of the discretion”
 
It is not surprising that the ATO has affirmed this decision, as the decision establishes a very high threshold for exercising the discretion. 
 

Posted in: Tax & ATO News Australia at 20 March 13

ATO's tough stance on excess contributions

Closely monitoring your superannuation contributions is critical because the ATO makes no exceptions if you exceed the superannuation contributions caps. A contributions cap sets a limit on the amount of contributions you can make in any financial year. In the 2012-2013 financial year, the limit is $25,000 for concessional (before tax) contributions and $150,000 for non-concessional (after tax) contributions. If you exceed these caps, your excess contributions are likely to be subject to the penalty tax.

 

The ATO has the discretion to disregard excess contributions if special circumstances exist, yet this discretion is not exercised lightly. A number of taxpayers have therefore challenged the ATO’s decision in the Administrative Appeals Tribunal (AAT). Unfortunately, the Tribunal has often sided with the ATO and these taxpayers have been forced to pay the penalty tax. In fact the Tribunal has only found in favour of the taxpayer in two cases. In both cases, the Tribunal held that special circumstances existed because there was a “perfect storm” of events, miscommunications and misunderstandings. With the spike in excess contributions tax (ECT) assessments again expected for the 2012-13 financial year, monitoring your superannuation contributions is critical.
 

Posted in: Tax & ATO News Australia at 21 January 13

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Author: David Hughes

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