Expert SMSF insights
Top issues with arbitrary limits for super contributions
By Graeme Colley
- Placing an age limit as an arbitrary cut-off point
- Situations where a person meets the small business CGT
- SIS regulations on accepting contributions
On the border – issues with arbitrary limits for super contributions
When arbitrary limits are imposed there will always be winners and losers. Take for instance superannuation where cut-offs can be based on age, meeting a particular condition or grandfathering. Some of these rules often appear grossly unfair with more losers than winners.
Placing an age limit as an arbitrary cut-off point is a common sticking point as it is obviously based solely on someone’s age. While an age limit is necessary to provide some certainty in the operation of a rule or law there are times when unintended consequences go against what was originally planned. Take for instance the implications of the age 65 cut-off for making contributions to super.
As a general rule, you can’t make personal superannuation contributions between 65 and 75 without meeting a work test. There are limited exceptions such as the downsizer contribution or the recently retired contribution. However, there are some who get caught unfairly by the age barrier.
Take for instance anyone who doesn’t meet the work test and qualifies for a structured settlement on invalidity grounds or someone selling their small business just prior to reaching age 65 but doesn’t receive the proceeds until after that time. The relevant amounts cannot be made to super in either situation in time although receipt of the payment may be beyond the member’s control.
Where a structured settlement payment is involved payment to the fund must be made within 90 days after the later of receipt of the payment, court order or settlement of the personal injury payment. The Commissioner has discretion to extend the period to make the payment to the fund. However, if the injured party turns 65 in the interim period and does not meet the work test the amount cannot be made to the fund because it is treated as a contribution.
In the situation where a person meets the small business CGT retirement exemption there is a similar result. The amount that qualifies for the concession is required to be made to the fund by the later of the lodgement of the person’s income tax return for the relevant year or, if they are older than 55, 30 days after receipt of the amount.
It is possible for the business to be sold prior to the person reaching age 65 but the payment(s) relating to the sale may be received over multiple years. It is interesting that where a payment for the small business CGT retirement exemption is a buy-out payment the amount is excluded from being subject to the contribution and work test rules in Regulation 7.04 of the SIS Regulations. However, any initial payment(s) that qualify under the small business CGT rules are required to meet the contributions and work tests for a person who is 65 or older.
The SIS Regulations allow the trustee to accept contributions after the times permitted if they are reasonably satisfied the contribution should have been made in respect of a previous a period. It appears this provision would not be available as the amounts in relation to the structured settlement and the CGT retirement exemption could not have been made prior to the member reaching 65.
It may be possible to change the contribution rules for structured settlements or small business CGT retirement exempt amount to overcome the age barrier. This would allow anyone who is eligible to receive a structured settlement or small business CGT amount payment prior to age 65 to make the payment if the amount is received after that age.
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