What new super rules mean for SMSF
Important concessional contributions changes from July 2017.
(Editor’s note: This is the first in a three-part series on recent changes to superannuation rules and what they mean for investors.)
With changes in the 2016 Federal Budget now passed by Parliament, trustees can have some certainty in their self-managed superannuation fund (SMSF) planning leading up to the end of the financial year and the contributions that can be made before and after 30 June 2017.
Concessional contributions (“pre-tax” contributions)
Currently the concessional contribution cap for 2016/17 is:
- $30,000 for people under 49 on 30 June 2016.
- $35,000 for those 49 and over on 30 June 2016.
Concessional contributions can be made up of the 9.5 per cent Super Guarantee contributions, salary sacrificed contributions and personal deductible contributions made by self-employed members for which the member claims a tax deduction.
Super Guarantee contributions are made by employers on behalf of their employees. Salary sacrifice contributions are additional contributions that employees can ask their employer to make from their pre-tax salary to super accounts.
To make a personal deductible contribution, you must satisfy the 10 per cent salary and wages threshold. This generally means that members who are self-employed or only receive a small fraction of their income from an employer, can access this concession for this financial year.
A deduction can be claimed in respect of a personal contribution if the income you received as an employee as assessable income, reportable fringe benefits and total superannuation contributions is less than 10 per cent of your total income from all sources, including income earned as a self-employed person.
From 1 July 2017, the 10 per cent rule will be abolished, which will allow all members, whether self-employed or not, to make deductible contributions until 75, effectively performing the same function a salary sacrificed contribution currently does for employees.
The following age restrictions also affect whether contributions can be made into an SMSF:
• Under 65: All contributions can be accepted by trustees.
• 65-74: Members must meet a work test to contribute into their SMSF. A member must work at least 40 hours during any consecutive 30-day period any time during the financial year. Once a member is 70, spouse contributions cannot be accepted.
• 75 and over: Only the 9.5 per cent Super Guarantee contributions can be received by trustees
From 1 July 2017, the concessional contribution cap will fall to $25,000. This will be indexed going forward in $2,500 increments in line with average weekly ordinary time earnings.
Caution should be exercised by members who have an automatic salary sacrifice arrangement currently in place. This needs to be adjusted to ensure that all concessional contributions made in the 2017/18 financial year do not exceed the new maximum concessional contribution cap of $25,000.
For members considering a reserving strategy before 30 June this financial year, advice should be sought as to the implications of the changes in the contribution cap rules. Essentially, the 2017/18 cap restricts amounts that can be contributed before 30 June 2017, but then placed in a reserve to be allocated after that date to a maximum of $25,000.
Non-concessional contributions (“after-tax” contribution)
Currently, the non-concessional contribution cap is $180,000 for the 2016/17 year (six times the concessional cap).
If a member is under 65, they also have access to the provisions allowing them to bring forward the next two years of contributions and average them over a three-year period.
Consequently, in the 2016/17 year up to $540,000 could be contributed as a non-concessional contribution, with nothing in the subsequent two years.
This is particularly important because from 1 July 2017 the non-concessional contribution cap will fall to $100,000. This will be a member’s last chance to get the higher non-concessional contribution amount of $540,000 in their superannuation fund before 30 June 2017.
An important additional condition on the ability to make non-concessional contributions will also apply from 1 July 2017. After this date, members will be unable to make any additional non-concessional contributions if their superannuation balance is more than $1.6 million on 30 June 2017.
Act now on non-concessional contributions
It is important to be mindful of the transitional bring-forward caps that have been introduced. If more than $180,000 is contributed but not the full $540,000 in 2016/17, this will trigger a reduced non-concessional contribution bring-forward cap for both 2017/18 and 2018/19.
For example, if $300,000 is contributed in 2016/17, then only $80,000 would remain in the reduced non-concessional contribution bring-forward cap: $380,000 transition cap = $180k (2016/17) + $100k (2017/18) + 100k (2018/19).
Being mindful of contribution caps is an essential part of the administration of your SMSF, as a breach of these caps will result in financial consequences for members.
If a member exceeds their concessional contributions cap, the excess amount will be included in the member’s personal assessable income and taxed at their marginal rate. The ATO will apply a 15 per cent offset when calculating your personal tax liability on this, due to the tax paid by the receiving SMSF on the excess contributions received.
The member then may elect to withdraw up to 85 per cent of the excess contribution from their SMSF. This may be used for any purpose, including to help pay the tax assessment on the excess contribution included in their personal tax return.
Alternatively, any excess contributions that are not withdrawn and consequently remain in your SMSF will convert into a non-concessional contribution and count towards your non-concessional contribution cap.
If a member exceeds their non-concessional contribution cap they will be liable for an associated earnings penalty due to the increase in investment returns because of the excess being invested in your SMSF. Excess non-concessional contributions can then be released following an ATO release authority, along with 85 per cent of the associated earnings, which need to be included in your personal assessable income.
Unlike excess concessional contributions, excess non-concessional contributions and associated earnings should not be left in your SMSF, as they will continue to garner associated earnings penalties.
Members should be aware of other types of contributions that can be made before and after 30 June 2017. These include:
- Contribution splitting – a member can split their concessional contributions to their spouse.
- Small business Capital Gains Tax (CGT) cap – contributions made following the disposal of a qualifying small business asset can be received by your SMSF up to a limit of $1.415 million and do not count towards your non-concessional contributions caps.
- Spouse contributions – a member can make non-concessional contributions into their spouse’s account. The member will be able to claim an 18 per cent tax offset up to $3,000 contributed, if their spouse has an income less than $13,800 in 2016/17 or $37,000 in 2017/18.
- Government co-contributions – the Government will match, for low-income earners, up to $500 on a $1,000 non-concessional contribution if the member meets the eligibility requirements.
The remaining months to 30 June 2017 is essential planning time for members with SMSF funds, especially those who want to maximise their contributions to their SMSF under current rules.
Great importance should be placed on any capacity to contribute a higher concessional contribution or non-concessional contributions for members nearing $1.6 million account balances, due to the reduction in caps and limits imposed from 1 July 2017.
Where you have capacity to contribute and wish to add to your SMSF savings, any opportunity to maximise your concessional and non-concessional contributions should be taken before 30 June 2017.
About the author
Peter Hogan is Head of Technical at SMSF Association. You can become a member of the SMSF Association Trustee Knowledge Centre to keep up to date with your SMSF and access practical checklists, planners and frequently asked questions. The cost is $99, which can be deducted from your fund. Become a member today. Follow: @SMSFassoc
Peter Hogan is Head of Technical at SMSF Association.
You can become a member of the SMSF Association Trustee Knowledge Centre to keep up to date with your SMSF and access practical checklists, planners and frequently asked questions. The cost is $99, which can be deducted from your fund. Become a member today.
SMSF Calculators provide a range of tools that help you determine how much retirement savings you will need and how different investment classes have performed over time.