Can a child make a deductible contribution and reduce trust income?
This is a great tax planning question and as with any technical strategy it needs to be considered in four stages:
1. Does the trust deed allow the strategy
2. Does the SIS Act 1993 allow the strategy?
3. What are the tax consequences of the proposed transaction?
4. What compliance documents and minutes are needed to make the strategy work?
I. Trust Deed
In terms of contributions, the LightYear Docs SMSF Trust Deed provides at Rule 5 which states as follows:
5.1 Trustee to have power to accept monies, assets and gifts or in-kind benefits
The Trustee may accept any money, property or Asset by way of a trust distribution, gift, Authorised Contribution, Rollover and transfer Superannuation Benefit on behalf of one or more past, current or future Members of the Fund. Such acceptance may be by way of cash, cash equivalent, Promissory Note or one or more assets or property, in-kind or deemed or in such other manner or form as the Superannuation Laws and the Regulator allows.
5.2 Sub-Funds for Non-Allowed Receipts
The Superannuation Laws may prevent or penalise the Trustee of the Fund from accepting the transfer of money or Assets or receiving a Contribution or Rollover on behalf of a Member. In this case, the Trustee may hold the money or assets in a sub-trust that does not form part of the Assets of the Fund. Earnings on any sub-trusts are to be kept separate from all other Fund Assets and the Trustee is to ensure the sub-trust is properly accounted for and returned according to the Superannuation Laws as soon as practicable.
5.3 Suspense Accounts
The Trustee may accept an Asset, monies, payments, in-kind benefit, distribution or such other amount for the benefit of one or more Members of the Fund, including future Members and at its discretion (unless otherwise required under the Superannuation Laws) may hold these amounts in a suspense account before being credited to an account or Member Superannuation Interest. There is no limit, unless the Superannuation Laws otherwise provide, as to the time any specific amount is held in the Suspense Account. Any Suspense Account, and the Trustee may create as many as they choose, may have its own Investment Strategy if the Trustee so chooses.
Result: A child member can make a personal contribution and in addition, other members may also contribute on behalf of a child member.
II. SIS Regulations 1994
SIS Regulation 1994 7.04 provides that the trustee of a regulated superannuation fund may accept contributions in the following circumstances:
If the member …
the fund may accept …
is under 65
contributions that are made in respect of the member
As such a contribution can be made by any person on behalf of anyone under age 65, even a one week old infant. There are limitations imposed on superannuation fund trustees and in relation to non-concessional contribution the cap is $110,000, subject to the three year rule and $27,500 for concessional contributions.
III. Income Tax Assessment Act 1997
Section 290-150 of the ITAA 97 provides conditions for making personal deductible contributions. IN short any person can make a tax-deductible contribution provided the following conditions are met:
The contribution is deductible only in the year it is made – see the ATO Ruling TR2010/1 – ATO contributions ruling
The fund must be a complying superannuation fund.
The aged related conditions are met – see below for children.
The contribution is not a downsizer contribution.
It cannot be a recontribution from a First Home Saver Scheme withdrawal.
A notice must be lodged with the Trustee of the intent to claim a deduction.
In terms of the tax consequence of a minor making a contribution into a SMSF, section 290 of the Income Tax Assessment Act 1997 provides as follows:
Section 290-165 Age-related conditions
(1) If you were under the age of 18 at the end of the income year in which you made the contribution, you must have *derived income in the income year:
(a) from the carrying on of a *business; or
(b) attributable to activities covered by subsection 290-160(1).
Section 290-160 of the Income Tax Assessment Act 1997 provides that the allowable activities including the:
(i) holding an office or appointment;
(ii) performing functions or duties;
(iii) engaging in work;
(iv) doing acts or things; and
(b) the activities result in you being treated as an employee for the purposes of the Superannuation Guarantee(Administration) Act 1992 (“SGC Act”).
For a minor contributor to a superannuation fund, there will not be too many who carry on a business so the employment leg is the key for deductibility. Accordingly for the minor to make a personal deductible contribution they will need to meet the following:
They are employed as evidenced by an employment agreement or documents. This could include any employment from McDonalds, a newspaper run or being employed by the family trust.
Their employer makes a contribution for them under the SGC Act or where they are not required to do so due to salary and wages being less than $450 per month or the minor is employed for less than 30 hours per month – see sections 27(2) and 28 of the SGC Act.
Note: if the minor is working full time and the employer pays SGC the child can still make a personal deductible contribution.
IV. How to do it
For the child making the personal deductible contribution, a family trust employer or any person make a contribution on behalf of the child you will need to do the following:
Appoint the child as member of the Fund using our Member Appointment – Standard SMSF (non-leading member)
Make the contribution using our Contributions to Benefit a Member.
Place into suspense account if you wish to go over the cap to push into next year using our Contributions Suspense Account