SMSF – Contribution Rules
Rules are set on who can contribute, how much and under what circumstances. An SMSF contribution can only be accepted if:
- You are under 65, regardless of your working status.
- You are aged between 65 and 69, your SMSF can accept employer mandated contributions. But for all other employer contributions or member contributions (like personal, spouse or other government contributions), you must satisfy a work test. If you work for at least 40 hours in a period of 30 consecutive days period, you will be able to make or receive contributions to your SMSF for the entire financial year.
- you are aged between 70 to 74, the rules apply as those for aged 65 to 69 but the SMSF cannot accept other member contributions not made by you (like spouse contributions). Contributions need to be received by the SMSF on or before the day that is 28 days after the end of the month when the member turns 75.
Types and Sub-types of Contributions that can be made to an SMSF
I. Concessional Contributions
These contributions is where tax deduction has been claimed for them, either by the member or employer.
a. Mandate employer contributions
These are SMSF contributions made by an employer for the benefit of the fund member. This includes superannuation contributions, superannuation shortfall components, award or certified related contributions, and payments from superannuation Holding Accounts Reserve. These are contributions made by your employer for your benefit. The SMSF can accept them any time regardless of your age and the number of hours you work.
b. Salary sacrifice contributions
These are voluntary contributions made by an employer to a member to his or her SMSF account instead of receiving the amount as salary. The objective is for the amount to be part of the SMSF income which is taxed at 15% than being taxed by up to 46.5% if passed as salary.
c. Personal contributions by self-employed
These are voluntary contributions you can make to your SMSF as an individual. A tax deduction can be claimed for the amount contributed. They are allowed if you are self-employed. They can also include in-specie asset contributions.
d. Allocation from a reserve that is not reasonable
These are allocations to a member from a ‘reserve’ kept within the SMSF.
II. Non-concessional Contributions
These are contributions where no one has claimed a tax deduction for them.
a. Personal Contributions
These are voluntary contributions made to your SMSF where no tax deductions have not been claimed. They are generally applicable to self-employed individuals, including in-specie asset contributions.
b. Eligible Spouse Contributions
These are SMSF contributions to a member account made by his or her spouse. To receive them, the member should be under the age of 65. If he or she is between 65 to70, they can be accepted if the member meet the work test or working 40 hours a week in a 30-day continuous period. If the member is 70 years or older, the contributions cannot be accepted by the SMSF. No age limit or employment test is necessary for the person making the contribution.
III. In specie Contributions
This type of SMSF contribution can be classified as either a concessional or non-concessional contribution. This also depends on your situation and the deductibility of the contribution. Trustees are generally prohibited from acquiring assets from related parties including members but there are exceptions to this rule:
- Securities like shares and warrants listed on an approved exchange at market value.
- Business real property that is acquired at arm’s length and at its current market value.
- Units held in unit trusts (like a managed funds) at their current market value
- Term and other deposits with an approved bank or deposit institution
- Assets classed as ‘in-house assets’
The contribution changes the legal ownership of the asset from the individual to the SMSF.
IV. Government Co-contributions
This SMSF contribution is an initiative to help low to medium income earners to save for their retirement. Once eligible to make personal super contributions to an SMSF, the government will match you with co-contribution to certain limits. You are eligible for co-contributions if:
- You make super contributions by June 30 of each year.
- Your total annual income is less than $48,516 in 2013/2014
- 10% of your income comes from employment, business or a combination of both
- You are less than 71 years old at the end of the income year
- You do not have a temporary resident visa at any time during the year
- You lodge income tax returns.
If you are eligible for the co-contribution, the ATO will calculate the co-contribution amount based on your personal income tax return and will deposit the co-contribution to your SMSF bank account or send you a cheque.
V. Contributions from the disposal of small business assets
If you sell small business assets and use the proceeds as SMSF contributions, these contributions will be excluded from non-concessional caps. There is a limit for this, otherwise known as lifetime super CGT cap. The lifetime maximum limit for exemption is $500,000 per individual.
Before making any contributions to your SMSF, you have to consider that the trust deed allows these contributions. If you have more questions about SMF contributions, talk to us and we will help you.
How much contribution is allowed for each type of SMSF Contribution?
The maximum amount of SMSF contribution for the concessional type should be:
$25,000 pa (general cap 2013/14). For those aged 60 and above is $35,000 (1/7/2013) and $35,000 for those aged 50 and above (1/7/2014). If you exceed the maximum, you will be taxed at your marginal tax rate.
For the non-concessional contributions, the maximum amount should be:
$150,000 per annum. If you are under 65, you can bring forward two years to count it at $450,000 over a 3-year period. The amount in excess of this is taxed at 46.5%.
For government co-contributions, the maximum amount is $500 per annum and is subject to income limits.
For Capital Gains Tax cap amount has a maximum of:
$1,315,000 lifetime limits as of 2013/14. If the lifetime limit is breached the excess amount is not exempt and is counted towards the non-concessional limit.
What is a 3-year bring forward rule?
For members who are under 65 years, is when a member contributes up to $450,000 in a single year, or other amount spread out over the 3 year period that add up to $450,000. When you exceed the $150,000 limit for the year, the bring-forward rule is triggered.
Can ATO return excess non-concessional contributions?
SIS regulation 7.04 rules that super funds should not accept non-concessional contributions in excess of the member’s non-concessional cap. It also states that a refund must occur within 30 days of the fund becoming aware of the excess amount. Refunds can be made for non-concessional contributions in excess of $450,000 for members who are 64 years or less on July 1 or in excess of $150,000 for members 65 years old but less than 75 years.
Making excessive contributions over the total, but no single contribution was excessive, will not allow the excess to be returned to you. Members should make sure they do not breach the caps to prevent excess.
Can excess concessional contributions be refunded?
The Federal Government in 2013/14 made changes which enable excess concessional contributions to be returned to members. These excess contributions are included in their tax returns and are taxed at marginal tax rates. From 2013/14, excess concessional contributions are no longer subject to excess contribution tax. Instead of having the excess contribution taxed at 31.5 % as the excess amount, it is included in the assessable income and taxed at marginal tax rate. However, you still have to pay the ‘excess concessional contribution charge’ as a tax on this contribution type is collected later. ATO will apply 15% tax offset to account for the contribution tax that has already been paid by the SMF. To pay the income tax assessment from excess contributions, you are allowed to withdraw up to 85% of the excess from the SMSF. This withdrawal will no longer count on your non-concessional cap.
Splitting contributions for SMSFs
These contributions refer to splitting concessional contributions between you and your spouse. This includes employer contributions or personal contributions that gives you the benefit of tax deductions.
- Splitting can be made after the end of the year and anytime up to the end of the following year.
- Transferring or splitting funds to a retired spouse is not allowed. This is when a spouse has reached the age of 55 or over and do not want work ever again.
- If contributions are made by an employer or you on a self-employed setup, where a tax deduction is claimed. Only 85% of the contribution can be split. The contribution will be a part of the assessable income of the SMSF and taxed at 15%.
- The trust deed should allow the splitting.
- Non-concessional contributions cannot be split with a spouse.
SMSF contributions from selling small business assets
Using proceeds from the sale of small business assets to make non-concessional contributions (NCC) to the SMSF, may allow these contributions to not count on the NCC cap.
- There is no assessable capital gain if the business owned an asset for 15 years and makes a gain when they sell it for members who are age 55 or over and are retiring.
- Capital gain on active businesses assets can be reduced by 50%.
- For retired members, a lifetime limit of $500,000 on capital gains applies to the sale of business assets. For those under 55 years, to get the exemption, the amount must be paid into the SMSF.
- Rollover exemptions allow members to defer capital gains until a later year if you sell an asset from a small business.
If you want to find out more about SMSF contribution rules or if you are looking for an SMSF auditor, talk to us and we are more than glad to help you.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.