By Monica Rule

This article examines what a superannuation contribution is and when it is considered to have been made to an SMSF.  The superannuation and income tax laws do not define the term “contribution”. However, in the Tax Office’s publication, Tax Ruling 2010/1, it states a “contribution” is anything of value that increases the capital of a superannuation fund provided by a person whose purpose is to benefit one or more particular members of the fund or all of the members in general.

Of course, not every increase in the capital of an SMSF is treated as a contribution.  It is necessary to consider the probable consequences of a transaction to determine whether a contribution has been made.  A person’s objective purpose is taken into account and not their subjective intention.  For example, an increase in an SMSF’s capital due to income, profits and gains arising from the use of the SMSF’s assets, is not derived from someone whose purpose is to benefit one or more particular members of the SMSF. Other examples include:

• an SMSF’s bank pays interest on deposits due to obligations arising under the contract it has with the SMSF and not to benefit SMSF members;
• an arm’s length lender for commercial reasons forgives a loan owed by an SMSF for business purposes and not to benefit the SMSF members; or
• a company pays a dividend to provide a return to its shareholders and not to benefit the members of a particular shareholder that happens to be a superannuation provider.

When a member deposits cash into their SMSF’s bank account, it is easy to conclude that a contribution is made, as the capital of their SMSF has been increased for the purpose of benefiting the member. However, there are other situations where a member may not realise they have made a contribution to their SMSF.  For example:

• a member transfers an asset without consideration to their SMSF;
• a member satisfies an SMSF’s loan obligation as a guarantor to the loan.  The guarantor’s payment extinguishes the SMSF’s liability to the lender and increases the capital of the SMSF.  However, in situations where the lender exercises both the right of recourse against the asset and requires a guarantor to satisfy any difference between the value of the asset and the outstanding loan amount, then the capital of the SMSF would not be increased.
• a member adds a fixture to an SMSF’s property;
• a member pays the SMSF’s expenses.  The payment of the expenses increases the capital of the SMSF because it extinguishes the liability of the SMSF.

The timing at which a contribution is made will determine whether the person who made the contribution is eligible to claim a tax deduction in a particular financial year, as well as whether they have exceeded their contributions caps.

In accordance with Tax Ruling 2010/1, a contribution is made when the capital of a fund is increased, and the capital of the fund is increased when an amount is received, or ownership of an asset is obtained or the fund otherwise obtains the benefit of an amount.   The Ruling provides the following examples:

Cash and EFT:  A cash contribution or a contribution made by an electronic funds transfer is made when the amount is received by the SMSF trustee or credited to the relevant SMSF bank account. 

Cheques and promissory notes:  A contribution made by money order, cheque or promissory note is made when the order, cheque or note is received by the SMSF.  If a cheque is post-dated or a promissory note is payable on a date later than the day on which the note is received, then the contribution will be made on the later of either the day the cheque or note is received or the date on which payment can be demanded as shown on the cheque or note.  No contribution will have been made if the cheque or note is dishonoured.

Property transfers: A contribution by way of a transfer of a property is made when the SMSF obtains legal or beneficial ownership of the asset from the contributor.  A beneficial ownership may be acquired earlier than legal ownership in situations where an SMSF acquires physical possession of the property.  However, ownership of property may also pass on the execution of a deed of transfer of the property notwithstanding there has been no change in the physical possession.  Legal ownership of property is normally evidenced by a system of formal registration where the SMSF is registered as the owner of the property.  In the case of a sale and an acquisition of land, beneficial ownership normally passes when the purchase is settled and the buyer hands over the purchase price in exchange for a completed transfer in registrable form, together with any other necessary documents including title deeds and discharge of mortgage that enable the transfer of title.

Share transfers:  A contribution of shares in a company is made when the legal ownership of the shares is recognised by the SMSF’s name being registered in the company’s share register.  This is for shares in a publicly listed company effected through the Clearing House Electronic Sub-register System (CHESS).  However, beneficial ownership of shares in an Australian Stock Exchange listed company can be effected through an off-market share transfer, when the SMSF obtains a properly executed off-market transfer in registrable form.

Whether a contribution is made when beneficial ownership of property passes is determined on a case by case basis.  An SMSF trustee that seeks to argue that the contribution of property occurs when the beneficial - not legal ownership - of the asset passes to the SMSF, must retain sufficient evidence of the relevant transactions and events to precisely identify when the change of beneficial ownership occurs.  Evidence can include: trustee minutes, the relevant transfer forms, and any other record of when the transfer took place. In the absence of evidence, the contribution will be treated as made when the SMSF obtains legal ownership of the property.

Improvements to an asset:  A contribution is made when the capital of the SMSF is increased because of the increase in value of the asset due to the improvements done on the SMSF’s asset.

Payment of a liability:  A contribution is made when a person satisfies an SMSF’s liability that results in the SMSF’s capital being increased.

Gold and Platinum Members read on for various scenarios on how to determine whether a superannuation contribution has been made and when it is made.

Monica Rule is an SMSF Specialist and author of The Self Managed Super Handbook – www.monicarule.com.au

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.

Related documents:

• Self Managed Superannuation Fund Deed
• SMSF - Deed Update
• Pension Pack for Self Managed Super
• Investment Strategy for Self Managed Super 15/16
• Derivative Risk Statement for SMSF

Related Webinars:

• Pitfalls That SMSF Trustees Should Avoid 
• SMSFs And Related Party Loans 
• The Protected Super Myth’Conception
• Tips And Traps For Property Investment In Your SMSF