With under one month left in the current financial year, time is running out to make sure that you have your house (i.e. your SMSF!) in order before the end of the 2016 financial year. Here are a few considerations to start you off!
1. Maximise concessional contributions up to the caps
With the budget proposing a cut in the concessional contribution cap to $25,000 from 1 July 2017, 2015/16 could be the second last income year to utilise a higher standard concessional contribution cap.
The standard concessional contribution cap for 2015/16 is $30,000, however, if you were at least age 49 on 30 June 2015, you have a higher transitional 2015/16 concessional cap of $35,000.
Remember that concessional contributions include:
- Your employer’s super contribution (the compulsory 9.5%);
- Any amount you contribute via salary sacrifice; and
- Any personal superannuation contribution that you are eligible and do claim as a personal income tax deduction.
Also note that allocations from a superannuation fund reserve to a member will count against the member’s concessional contribution cap. Some limited exceptions apply.
For those of you who qualify for the higher $35,000 concessional cap, if the proposed reduction to the concessional cap becomes law, then you will also be subject to the lower $25,000 concessional cap from 1 July 2017. There will be no higher cap for older members. So, 2015/16 and 2016/17 are the income years to maximise your higher transitional cap, with an additional $10,000 in concessional contributions over the proposed reduced $25,000 cap.
2. Claiming personal superannuation contributions as an income tax deduction – make sure you qualify
Where a member is planning to claim a personal superannuation contribution as an income tax deduction, we will make sure you are eligible for a deduction. Where you have some employment related income, you need to satisfy what is referred to as the “10% rule” to be eligible to claim a personal superannuation contribution as an income tax deduction (the removal of the “10% rule” was announced as a proposed change to have effect from 1 July 2017, but still applies for 2015/16 and 2016/17 income years).
Further, for personal contributions claimed as an income tax deduction, the relevant notice of deductibility and acknowledgement by the fund trustee(s) is required. It is important that the correct notice and acknowledgement are provided to substantiate any claim in the event of a review by the ATO, particularly of a member’s personal tax return.
If a pension has been commenced during the income year or a lump sum benefit paid and included personal contributions that will be claimed as an income tax deduction in the member’s personal tax return, be sure that the notice of deductibility was provided prior to the pension being commenced or the lump sum benefit is paid, otherwise the notice can be deemed invalid and the deduction denied.
3. Uncertainty around non-concessional contributions
Prior to the Budget, the non-concessional contributions cap was set at 6 times the standard concessional cap – $180,000 for 2015/16. Further, if a member was under age 65 at any time during the income year, they could use what is commonly referred to as the “bring forward rule”, which allowed eligible persons to bring forward the next 2 years of their non-concessional cap. This effectively allowed them to contribute a maximum of $540,000 non-concessional contributions in the one income year.
Prior to the Budget, a year end check would be to utilise the annual non-concessional cap and if you had attained age 65 during the 2015/16 income year, that it would be the last opportunity to trigger the “bring forward rule”. However, the Budget proposed a $500,000 lifetime non-concessional contributions cap, effective from Budget night, which will include all non-concessional contributions made since 1 July 2007. Whilst there has been considerable debate about whether this proposal is retrospective law, there is no doubt that it has a retrospective effect on a person’s contribution and retirement plans.
Where a person had exceeded $500,000 in non-concessional contributions from 1 July 2007 up to 7.30pm (AEST) budget night, these will not be treated as excessive and can remain within the superannuation fund, however, any post budget night excessive non-concessional contributions will need to be removed or be subject to penalty tax.
Whilst not law, individuals wishing to make non-concessional contributions after budget night will need to take into consideration all of their non-concessional contributions made since 1 July 2007 and what effect exceeding the proposed $500,000 lifetime limit, post Budget night, will have on them, should the proposal become law.
Just to note, it is our understanding that the CGT lifetime cap for qualifying small business owners and the Personal Injury election for structured settlements will continue to operate separately from the proposed $500,000 lifetime non-concessional contribution cap.
4. Make sure the super fund can accept a contribution
The age of the member will also determine the circumstances that a superannuation fund can accept a contribution either from or on behalf of a member. There are no restrictions on acceptance of contributions for people under 65, other than the contribution caps. However, between 65 and 74, a fund can only accept a contribution if the member meets what is commonly referred to as the “work test” (40 hours paid employment over any 30-day consecutive period during the financial year). It is accepted that the “work test’ should be satisfied prior to the contribution being accepted by the fund. Once you have turned 75, or more precisely, 28 days after the end of the month your turn 75, your fund can only accept employer-mandated contributions (the compulsory 9.5%).
Note that the 2016 Federal Budget proposes to remove the “work test”, from 1 July 2017, for those aged 65 to 74. However, even if passed, the “work test” will still apply for the 2015/16 and 2016/17 income years.
5. Don’t leave contributions to the last minute
While 30 June 2016 is a Thursday, it is best that you make contributions well before then to make sure they will be treated as contributions received in the 2015/16 income year. This is particularly so when it comes to electronic transfer of superannuation contributions, as the tax office ruling TR 2010/1 states that where a contribution is made by way of electronic transfer, it is considered as being received by the superannuation fund only when the monies are credited to the superannuation fund’s bank account. Where taxpayers have salary sacrifice arrangements in place and are using all of their concessional contribution cap, they should confirm with their employer as to when the electronic payment of their contribution will be made to ascertain whether or not it will hit their SMSF bank account by 30 June 2016, consequently being treated as a 2015/16 contribution and counting towards their 2015/16 concessional cap. If credited to the SMSF’s bank account after 30 June 2016 it will count towards their 2016/17 concessional cap, which may require an unwanted adjustment to their 2016/17 salary sacrifice arrangements. Care should be taken with any contribution made by way of electronic transfer on 30 June 2016 as they are most likely not going to show as a deposit in the SMSF’s bank account until at least 1 July 2016, which is too late for the 2015/16 income year.
However, the old fashioned contribution by way of cheque method may provide a solution for the last minute contribution, as TR 2010/1 states that where a contribution is made by way of personal cheque, the contribution is made when the personal cheque is received by the fund, so long as the cheque is promptly presented and honoured. Again, however, best practise would be to be able to show the contribution as a deposit in the fund’s bank account no later than 30 June 2016.