Why Paying Expenses on behalf of a SMSF may constitute a Contribution


If you decide to pay an expense on behalf of your SMSF for any reason then that can constitute a contribution to the SMSF which you may not have intended and may lead you to inadvertently exceeding a contribution cap.

Don't exceed Caps

Who’s paying?

Funny how it always seems that it is the people who rush in to using a strategy and seek to push a strategy right to the limit who are also the ones who ignore warnings and step over the line thinking their advisers will “sort it”. The problem is once the limit is exceeded and June 30th passes it is often too late to “fix”. This could generate a huge excess contributions tax liability for those tinkering on the edge of the non-concessional contribution limit.

If a member/trustee pays for a fund expense on behalf of the fund, and if the member/trustee does not seek reimbursement for this expense immediately, the amount will be treated as a contribution to the fund.

Technically, a superannuation 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 members in general’. See TR 2010/1 Income tax: superannuation contributions.

The meaning of contribution is therefore wider than just a direct payment of money or an in specie transfer of an asset to the SMSF. 

For instance, the capital of a SMSF may be increased by something of value provided directly or indirectly in a number of ways, including:

Ignoring and thereby forgiving a debt owed by the SMSF to a member. Example: the members / trustees of a SMSF provide taxation services to the SMSF through their accounting partnership and the business issues the invoice to the trustees, but the business forgives the invoiced liability;

personally paying an invoice to a third-party and thereby benefiting the SMSF. Example; payment of the SMSF’s ASIC fees or Trust Deed upgrade costs by a member from the member’s own bank account;

creating rights in the SMSF. Example ; a right to receive distributions of income or capital from a discretionary trust; and shifting value to an asset owned by the SMSF. For example, an improvement to a SMSF asset.

Therefore, whenever the capital of a SMSF may be increased the SMSF trustee should consider whether a contribution has been made and, if so, check that the contributions caps in that year are not exceeded. Otherwise, excess contributions tax is payable.

But let’s keep it simple, pay all expenses of the fund from the fund! Don’t try to be too clever as he ATO now has powers to apply fines an penalties which gives it more flexibility in cracking the compliance whip!

If you are not sure if you are “testing the limits”  just use the “Schedule Now” option on the top left of this page or call our Castle Hill or Windsor Offices in the Norwest of Sydney for an appointment on 02 98941844 or 02 88536833.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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3 Comments

  1. Hanchar

     /  February 22, 2016

    If some expenses paid by the member (because of lack cash in the fund) and never could reimburse by the end of June 30 (lack of cash), can that be shown as ‘loan from the member’?

    If yes, that means the member can be reimbursed later (when cash available).

    If no, that means that will be considered as member contribution (non concessional)

    My other question is, whatever the case above, that is still a valid expense for the fund. Isn’t it? (the expenses was not paid from the fund account)

    Like

    Reply
  2. Dhara

     /  September 30, 2015

    So what happens when a retired member who is more than 65 years of age pay for SMSF expenses from non SMSF funds?

    Like

    Reply
    • It’s a compliance breach and the trustees should repay the funds to the member ASAP but it’s up to the Auditor to make a contravention report which could lead to penalties. Better to have a solution ready then allow report without a rectification strategy

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      Reply

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