The new financial year brings some changes to the contribution rules. And whenever there are changes, there’s a need to revisit how the contribution rules work to make sure SMSF trustees and members don’t get caught out. It is important to understand that superannuation law dictates when the trustees can accept a contribution and tax law determines how much a member can contribute that is subject to tax concessions. The consequences of doing the wrong thing will ultimately be determined by which rules are broken. You’ll get it all right though, of course.
As of 1 July 2020, superannuation laws have been amended to allow any individual aged under 67 to make member (including spouse) contributions without having to satisfy any gainful employment condition. This change is simply a lifting of the age limit for when the work test applies from 65 to 67. This is a different rule to that introduced from 1 July 2019 where anyone with a total superannuation balance less than $300,000, aged 67 to 75, can make a contribution subject to having met the work test in the previous financial year. For those turning 75, contributions must be made no later than 28 days following the end of the month in which they turned 75.
From age 67, anyone who wants to make a contribution, excluding the limited exemption above, must satisfy the work test i.e. be gainfully employed for at least 40 hours in a 30 consecutive day period.
In the event that the trustees accept a contribution that they otherwise cannot accept by law, the trustees must return the amount within 30 days of being made aware of the contribution. In the case of SMSFs given that the members and trustees are often one and the same, the 30-days kicks in as soon as the contribution is made. If the trustees fail to return the amount within 30 days, then the fund is in breach of its obligations and the fund auditor may be required to report the matter to the ATO. Usually this matter is rectified by the trustee returning the money to the member. It is possible, although unlikely, that the ATO may impose an administrative penalty for a fund that fails to return the contribution within the 30-day period. Repeat infringements may strengthen the likelihood of penalties.
Often people get these returned amounts confused with excess contributions which are also subject to refunding but under a totally different regime.
Whilst the above identifies amounts that can’t be accepted and ultimately are not considered contributions, the situation often arises where the trustees can accept contributions under superannuation rules but the amount accepted exceeds the limit entitled to concessional tax treatment under tax laws, the contribution caps. In the event that the trustees accept an amount that exceeds the cap the ATO will send the member an excess contribution determination and the member must make a decision whether to refund the contribution or to retain it in super and have it subjected to a higher tax rate.
For non-concessional (after tax) member contributions the annual limit that is subject to tax concessions is determined firstly by how much money someone has in superannuation at the preceding 30 June and then by their age and potentially how much has been contributed in the preceding two year period. The standard non-concessional contribution cap is currently four (4) times the concessional cap. As the concessional cap is $25,000 the non-concessional cap is $100,000. However, if a member’s total superannuation balance at the preceding 30 June is $1.6m or more, then the cap is nil. If the personal cap is nil then any amount put in the fund will be considered an excess contribution and will need to be refunded or taxed at the minimum rate of 47%, which will need to be paid by the fund regardless.
Even where the member elects to refund it, it will be required to be refunded via the ATO, not directly to the member. The ATO may then withhold any other liabilities that the member may have to the Government.
Non-concessional contributions are also subject to bring-forward rules which allow members to make up to three years’ worth of contributions in one year if they are eligible. We will review the bring forward rule in a future article as there is currently legislation before Parliament which seeks to amend these rules.
Overall, it’s important that trustees and members understand the contribution rules as it’s far less of an inconvenience to get things right the first time.
Important: 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. Consider the appropriateness of the information in regard to your circumstances.