Sometimes, it’s possible you may come across a large sum of money that you would like to inject into your super all at once. This is particularly the case if you want to make the most of potential capital gains in the short-term.
The only problem is that each member of your SMSF can only put $150,000 into it a year. Anything above that amount will be taxed very heavily. But there is a way around this, and it’s called the ‘bring forward’ rule.
You can only use the bring forward rule before you turn 65, and it basically allows you to lump three years’ worth of contributions into larger contributions that can exceed $150,000, as long as you don’t exceed $450,000 over the three-year period ($150,000 x 3 = $450,000). So in effect, whether you use the bring forward rule or not, the amount you’re allowed to contribute over three years remains the same. The only difference is that the rule allows you to make those contributions sooner.
Let’s look at an example of how the bring forward rule works.
Suppose Jim is aged 50 and wants to know how much he can make in non-concessional contributions in the 2012 financial year. Assume that in the 20008/09 financial year he made $200,000 in non-concessional contributions, no contributions in 2009/10, and $250,000 in non-concessional contributions in 2010/11.
It’s important to not only look at what occurred in the 2010/11 financial year, but also in the period before that. If you don’t take this into consideration, then you would conclude that Jim could only contribute $200,000 to his super in 2011/12.
Because Jim exceeded the $150,000 annual cap in 2008/09, his three-year period is considered to have begun on 1 July 2008. This means that this three-year period finished on 30 June 2011.
Therefore a potential new three-year period commenced on 1 July 2011, meaning that Jim is actually free to contribute $450,000 in non-concessional contributions in the 2011/12 financial year.
Technically, this rule applies to anyone who is aged under 65 at the start of a financial year. Once you turn 65, the three-year in advance rule disappears and only $150,000 in non-concessional contributions can be made in any financial year before the 46.5% penalty tax will apply. Once you turn 75, you’re no longer able to make contributions to your SMSF.
If you’re over 65, you’ll have to satisfy a work test in order to make these contributions. This test says that you must be gainfully employed for at least 40 hours in any consecutive 30-day period during a financial year. Super contributions can’t be made before this work test has been satisfied.
So what happens around your 65th birthday especially, if you made a $450,000 contribution one month before reaching that milestone? This will be the subject of my post next Thursday.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in today’s Switzer Super Report
- Peter Switzer:Â What would Buffett do?
- Charlie Aitken:Â What I recommend for your portfolio
- Ron Bewley: What not to buy – Part 3: stocks to neglect
