How often are you left with a client who makes a contribution after the date you tell them to? For example, if you told your client to make a contribution the week before 30 June, however, due to the client’s inability to remember this important date, they make the contribution after the advised date, only for the contribution to reach the funds bank account in the first week of July. If this was your client, in what year would you declare the contribution?
It is important that the different sources of contributions received by an SMSF are properly identified to enable correct treatment in the financial statements.
TR 2010/1 is a very important ruling, as it provides direction with respect to timing of contributions, including payments by way of cheques or promissory notes; payments made by person to a third party to satisfy a liability; and a contribution by way of debt forgiveness.
Paragraph 13 of the ruling details when certain payments will be deemed to have been received by the fund:
If the funds are transferred by ...
A contribution is made when ...
Making a cash payment to the SMSF
The cash is received by the SMSF
An electronic transfer of funds to the SMSF
The funds are credited to the SMSF's account.
Giving the SMSF a money order or bank cheque on which payment is made
The money order or bank cheque is received by the SMSF, unless the order or cheque is dishonoured.
Giving the SMSF a personal cheque (other than one that is post-dated) that is presented and honoured with cash or its electronic equivalent
The personal cheque is received by the SMSF, so long as the cheque is promptly presented and is honoured.
Giving the SMSF a personal cheque that is post-dated and that is presented and honoured with cash or its electronic equivalent
The cheque is able to be presented for the payment (that is, the date on the cheque), so long as the cheque is promptly presented and is honoured.
A related party (as maker) issuing a promissory note, payable on demand at face value, to the SMSF and the note is paid with cash or its electronic equivalent
The promissory note is received, so long as payment is demanded promptly and the note is honoured.
A related party (as maker) issuing a promissory note, payable on a future date at face value, to the SMSF and the note is paid with cash or its electronic equivalent
Payment is able to be demanded or required to be made, so long as the demand (if required) is promptly made and the note is honoured.
What should be noted is that when a contribution is being paid by way of a cheque, the contribution is “deemed” to be made when the contribution is received by the trustees of the fund, provided the intention is to present the cheque for payment in a timely manner. However, where a member pays a contribution by way of electronic transfer, the contribution is counted as being made when the contribution hits the SMSF’s bank account.
So, when a member of a SMSF writes a cheque on 28 June, and it is not deposited in the SMSFs bank account until 1 July, the contribution will be treated as having been made in June, providing the cheque is in the hands of the trustees before midnight on 30 June.
If you have a SMSF that is in this situation, we suggest you consider following these steps:
- Determine when the cheque was dated and when the money hit the SMSF’s bank account.
Remember, the contribution can only be counted in the initial year if the intention is to present the cheque for payment in a timely manner.
(There is no indication given of how many days would be considered “Timely”. Our view is less than 5 business days)
- To ensure that their contribution was received and counted in the initial year, a simple written and dated acknowledgement of receipt of the contribution should be prepared to confirm when the trustees received the contribution.
- In the SMSF’s accounts, the contribution needs to be shown as an unpresented cheque, not a sundry creditor.