SMSF Rules

[Fred51]

A farmer sells his farm with a contract date of 1 April 2015 but a settlement date of 1 July 2015. The farmer will retire once the farm sells.

The farmer, a sole trader, is 71 years old and the farm meets all of the small business CGT 15 year exemption conditions. He would like to contribute the maximum amount under the small business CGT Cap rules (currently $1,355,000) plus the non-concessional limit of $180,000.

My understanding is that because the farmer is over 65, he must pass the work test to be able to make a contribution.

Passing the work test would not be a problem for the 2014/15 year whilst he is running the farm. However if he retired effectively on 1 July 2015, it may be difficult to pass this test during 2015/16.

Questions please are:
1. Does the work test have to be satisfied for the year 2015/16 when the contribution will be made or for 2014/15 when the capital gain is derived?
2. Could the farmer borrow some funds from a friend and actually make the contribution on 30 June 2015 i.e. before the sale funds are actually received but after the contract sale date?

 

[Paul@PFI]

Assuming he satisfies the small business turnover and active asset tests....

A (lifetime) CGT cap contribution under the 15 year CGT exemption rules require the person to satisfy a work test in the year of the contribution.
The 1st July settlement appears a poor decision. Its not possible to the satisfy the work test based on the farm in the subsequent year. Can settlement be bought fwd one day ? Can the buyer employ Dad as part of the handover ?

The interaction of the small business and super CGT cap rules are complex and one affects the other !! The proceeds from the sale of the farm will affect how much of a potential contribution can be made as either CGT cap or NCC.

Borrowing may work. The CGT event is dated April 2015. Its a large loan amount.

To avoid significant errors with caps and non-compliance I would STRONGLY recommend you seek personal advice before acting.

 

[marg4000]

Relative was in a similar position.

Retired and just 65 he sold an investment property, contract June to settle in July. He could meet work test conditions for current year, but not the year when he would receive the funds. He arranged a short term loan to contribute to super, which had the added benefit of being deductible against the CGT tax to be paid.

As an alternative, could settlement be delayed by 10-14 days? The work test is only 40 hours (within a set number of days) which would be worked up quickly by a farmer.
Marg

 

[Paul@PFI]

Relative was in a similar position.

Retired and just 65 he sold an investment property, contract June to settle in July. He could meet work test conditions for current year, but not the year when he would receive the funds. He arranged a short term loan to contribute to super, which had the added benefit of being deductible against the CGT tax to be paid.

As an alternative, could settlement be delayed by 10-14 days? The work test is only 40 hours (within a set number of days) which would be worked up quickly by a farmer.
Marg

Not sure I agree that the loan interest is deductible or a CGT cost element. IMO its a loan to pay a private expense (super contribution).

 

[dan c]

Quick thought re: borrowing. The 15 year rule talks of contributing the 'proceeds of sale' into superannuation and having this count against the lifetime cap.

Question: If the taxpayer borrows to contribute before the settlement, are they contributing the proceeds? They haven't received the proceeds at the time of contribution?

If the sale happened in April 2015, the taxpayer has until the date of lodgement of the tax return, possible as late as 15 May 2016, to contribute the funds into a superannuation account (for CGT cap purposes). This would give 11 months to pass a work test.

 

[Paul@PFI]

Quick thought re: borrowing. The 15 year rule talks of contributing the 'proceeds of sale' into superannuation and having this count against the lifetime cap.

Question: If the taxpayer borrows to contribute before the settlement, are they contributing the proceeds? They haven't received the proceeds at the time of contribution?

If the sale happened in April 2015, the taxpayer has until the date of lodgement of the tax return, possible as late as 15 May 2016, to contribute the funds into a superannuation account (for CGT cap purposes). This would give 11 months to pass a work test.

Hmmm. The work test rule must have been be satisfied when the contribution is made. Hence prior to the contribution the work test must be satisfied, not later. The CGT event basically ends the ability to meet the work test so the solution is to move that event to a later date in the new tax year.

Deferral of the settlement achieves all the objectives without uncertainty. Good tax advice would have been to settle in mid July after meeting the work test. Lawyer should pose the question to the buyers if they will allow the settlement to be deferred.

 

[dan c]

Hmmm. The work test rule must have been be satisfied when the contribution is made. Hence prior to the contribution the work test must be satisfied, not later. The CGT event basically ends the ability to meet the work test so the solution is to move that event to a later date in the new tax year.

Deferral of the settlement achieves all the objectives without uncertainty. Good tax advice would have been to settle in mid July after meeting the work test. Lawyer should pose the question to the buyers if they will allow the settlement to be deferred.

Correct, the work test has to be satisfied before the contribution is made. Moving settlement should allow for the work test to be completed.

If the purchaser won't move settlement, what then?

One idea is to satisfy the work test some other way, and as the contribution doesn't have to made until March (at the earliest - assuming they are registered with a TA and returns are up to date) of the following year, the taxpayer has nine months to satisfy a work test.

Just another option if settlement can't be moved.

 

[Fred51]

Hmmm. The work test rule must have been be satisfied when the contribution is made. Hence prior to the contribution the work test must be satisfied, not later. The CGT event basically ends the ability to meet the work test so the solution is to move that event to a later date in the new tax year.

Deferral of the settlement achieves all the objectives without uncertainty. Good tax advice would have been to settle in mid July after meeting the work test. Lawyer should pose the question to the buyers if they will allow the settlement to be deferred.

OK Now you have really confused me.

You say the work test must have been met BEFORE the contribution is made? And then you say the CGT event (which I understand to be the contract date) ends the ability to meet the work test?

What I think you mean is that the the work test can be satisfied at any time in the financial year in which the contribution is made, and that this would be difficult if the property settles on 1 July 15.

My understanding is that the contribution can be made at any time between the CGT event (which I take to be the contract date) and the lodging of the tax return for that year which could be up to May 2016.

So would you be able to confirm:
1. Assuming a contribution is made on 1 July 2015, can the work test be satisfied at any time during the 2015/16 financial year?
2. Can part or all of the contribution be made before settlement i.e. in the 2014/15 financial year?
Reference to specific legislation would ease my mind a little.

 

[dan c]

OK Now you have really confused me.

You say the work test must have been met BEFORE the contribution is made? And then you say the CGT event (which I understand to be the contract date) ends the ability to meet the work test?

Yes, the work test must be satisfied BEFORE any superannuation contribution is made for the over 65's.

The CGT event doesn't end the ability to meet the work test, but the original facts state that the work test may be difficult to pass if the person retires. Perhaps the seller could contract to the buyer to pass the work test? Or work for a friend in the district etc.

What I think you mean is that the the work test can be satisfied at any time in the financial year in which the contribution is made, and that this would be difficult if the property settles on 1 July 15.

Not exactly. If the property settled, say, on 1 August, the vendor would have worked for a month in that financial year, satisfying the work test. The contribution can be made at any time up to the due date of lodgement of the tax return, but the work test must be satisfied BEFORE the contribution is made.

My understanding is that the contribution can be made at any time between the CGT event (which I take to be the contract date) and the lodging of the tax return for that year which could be up to May 2016.

Yes.

So would you be able to confirm:
1. Assuming a contribution is made on 1 July 2015, can the work test be satisfied at any time during the 2015/16 financial year?
2. Can part or all of the contribution be made before settlement i.e. in the 2014/15 financial year?
Reference to specific legislation would ease my mind a little.

1. No. Work test must be satisfied before a contribution is made to the super fund.

2. The legislation (s292-100) talks of contributing 'capital proceeds'. Although it doesn't say so specifically, I would doubt that you can contribute before receiving the capital proceeds from sale. My reasoning is that if you contribute on 15 June for example, you are not contributing capital proceeds, you are contributing other funds.

 

[Paul@PFI]

OK Now you have really confused me.

You say the work test must have been met BEFORE the contribution is made? And then you say the CGT event (which I understand to be the contract date) ends the ability to meet the work test? YES. Before not after

What I think you mean is that the the work test can be satisfied at any time in the financial year in which the contribution is made, and that this would be difficult if the property settles on 1 July 15. If that is BEFORE the contribution is made within the same FY then yes you have noted the problem

My understanding is that the contribution can be made at any time between the CGT event (which I take to be the contract date) and the lodging of the tax return for that year which could be up to May 2016.

Except the work test uses different terms. It refers to the CONTRIBUTION. You cant contribute capital proceeds without the CGT event. Especially if its in another year. No rollover !!

So would you be able to confirm:
1. Assuming a contribution is made on 1 July 2015, can the work test be satisfied at any time during the 2015/16 financial year?NO. Likely impossible due to age requirement imposing work test
2. Can part or all of the contribution be made before settlement i.e. in the 2014/15 financial year? No.
Reference to specific legislation would ease my mind a little.

Sorry that English is hard to understand. I assumed it to be a easy issue. One of sequence and timing. That causes more tax issues than anything. I have noted in bold above, new comments.

I think you may appreciate I don't extend personal tax advice and written client advice to SS. You wont find a single piece of tax law to satisfy your confusion. The issue is that CGT rules require a contribution AFTER a CGT event. You cant contribute before the event or its just a non-concessional contribution subject to a lower cap and age based work test limit also.

This is a significant issue. Why would you not seek advice ?

 

[dan c]

The work test requires the individual to work for 40 hours in a period of not more than 30 days. Even though the individual has sold the farm and plans to retire, they could perhaps pass the work test some other way.

We had a 70+ year old client who delivered catalogues for one month a year, solely to pass the work test.

It's not 'Likely Impossible' as Paul suggests, it would in fact be quite easy to find a way to satisfy the requirements of the work test.

 

[Fred51]

Sorry that English is hard to understand. I assumed it to be a easy issue.

Is this sarcasm?

My problem is with the following:

You say the work test must have been met BEFORE the contribution is made? And then you say the CGT event (which I understand to be the contract date) ends the ability to meet the work test? YES. Before not after.

However I have now read the legislation and it is clear that the work test only needs to be satisfied at some point during the relevant year in which the contribution is to be made.

I realise that there may be an issue if the contribution is made and then the work test is subsequently not satisfied.

Can part or all of the contribution be made before settlement i.e. in the 2014/15 financial year? No.

Reading the legislation I also have a problem with this. The wording in section 292-100, specifically para(2)(a) is: (a) the contribution is equal to all or part of the *capital proceeds from a *CGT event for which you can disregard any *capital gain under section 152-105 (or would be able to do so, assuming that a capital gain arose from the event);

On my reading (obviously open to interpretation), the wording of the para does not actually require that the contribution is made using the proceeds from the disposal. It simply has to be equal to "all or part" of the proceeds. Further, sec,292-100 specifies maximum times after the CGT event that the contributions can be made, but does not specify any minimum times. Therefore, provided the disposal has occurred (which of course would be the contract date) then it would seem that the contribution should be able to be made before the settlement date.

 

[Rob G.]

However I have now read the legislation and it is clear that the work test only needs to be satisfied at some point during the relevant year in which the contribution is to be made.

That is my understanding of SIS Reg 7.01(3)

Reading the legislation I also have a problem with this. The wording in section 292-100, specifically para(2)(a) is: (a) the contribution is equal to all or part of the *capital proceeds from a *CGT event for which you can disregard any *capital gain under section 152-105 (or would be able to do so, assuming that a capital gain arose from the event);

On my reading (obviously open to interpretation), the wording of the para does not actually require that the contribution is made using the proceeds from the disposal. It simply has to be equal to "all or part" of the proceeds. Further, sec,292-100 specifies maximum times after the CGT event that the contributions can be made, but does not specify any minimum times. Therefore, provided the disposal has occurred (which of course would be the contract date) then it would seem that the contribution should be able to be made before the settlement date.

You appear to have "capital proceeds" this year as well as the CGT event to which the small business concessions can apply.

CGT event A1 occurs when the contract/agreement is made, s.104-10(3)(a).

Therefore it appears that the opportunity to disregard any capital gain starts at the date of the agreement.

Capital proceeds from that CGT event is the money received or *RECEIVABLE* , s.116-20(1)(a) ITAA97.

It appears that you have capital proceeds this year from the CGT event.

Part 3-3 ITAA97 (including small business CGT concessions) applies to you if you are entitled to receive money but you will not receive it until a later time, s.103-10(2)(b)(I) ITAA97.

The physical source of those funds may not be relevant and your argument appears to have merit.

Since so much is at stake, you really need detailed advice before acting. Any ruling application will take a long time.

 

[Rob G.]

The biggest risk is that the contract fails to settle.

e.g. CGT event A1 is taken never to have happened if the sale falls through on 1 July 2015 (Note 1 to s.104-10(3)).

Then any SMSF contributions prior to settlement may breach the contribution caps.

Any forfeited deposit or compensation may form part of the proceeds for CGT event H1 which is not specifically excluded from the small business CGT concessions, s.152-10(4).

However, if you continue to have the farm on the market and sell later then these amounts will form part of the proceeds for a later CGT event instead and H1 is ignored, TR 1999/9.

I presume that for GST reasons you are continuing to operate the farming business until settlement day.

 

[Paul@PFI]

The biggest risk is that the contract fails to settle.

e.g. CGT event A1 is taken never to have happened if the sale falls through on 1 July 2015 (Note 1 to s.104-10(3)).

Then any SMSF contributions prior to settlement may breach the contribution caps.

Any forfeited deposit or compensation may form part of the proceeds for CGT event H1 which is not specifically excluded from the small business CGT concessions, s.152-10(4).

However, if you continue to have the farm on the market and sell later then these amounts will form part of the proceeds for a later CGT event instead and H1 is ignored, TR 1999/9.

I presume that for GST reasons you are continuing to operate the farming business until settlement day.

Rob - An inherent risk with timing and sequence issues with small business concessions. Well pointed out.

 

[Fred51]

Rob - An inherent risk with timing and sequence issues with small business concessions. Well pointed out.

Just a simple "I was wrong " would suffice.

 

[Rob G.]

Just work as a casual employee on the farm for a month after settlement as part of the business handover to satisfy the work test in FY2016.

 

[Fred51]

Thanks Rob.

Great contribution to this interesting issue.

 

[Paul@PFI]

Just a simple "I was wrong " would suffice.

Not if I wasnt. Ummm actually I didn't disagree with this view. What Rob pointed out was the problem with trying to pre-empt a CGT event which may then not be a qualfying event (A1). I also take the view further and don't believe that a small business super contribution can be made before the CGT event. The proceeds cant be available to contribute. So borrowing doesn't work (except for the NCC portion)

Its easier to defer settlement and /or reach agreement to be GAINFULLY employed post 1 July. The danger with gainful employment is you must be remunerated. You can work your butt off and still fail the test. Its also why I didn't encourage it - Too easy for misunderstanding. The ATO do check CGT and large cap contributions made by those over 71 as a matter of practice.
I wouldn't like to explain to a person that 49% of the CGT amount will be lost to tax.

 

[brucea]

The danger with gainful employment is you must be remunerated. You can work your butt off and still fail the test.

The definition of gainful employment in s 1.03 is pretty broad:
gainfully employed means employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

Doesn't sound too hard to document and report on a tax return some paid baby-sitting or mowing for friends or family.