As part of our end of financial year checklist for SMSFs, here are the next five important points for you to get sorted!
6. Spouse contributions – can you access the $540 tax offset for your spouse?
If you have a non-working or low-income spouse, who is less than 70 years of age, then you may be eligible for a tax offset of up to $540. For each $1 of spouse contribution you make, up to the maximum of $3,000, a tax offset of 18% is available ($3,000 x 18% = $540).
Your spouse’s income (which includes assessable income, reportable fringe benefits and reportable employer super contributions) is tested as follows:
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Above a spousal income of $10,800, the maximum spouse contribution is reduced on a dollar for dollar basis, so that it is fully phased out when the spousal income exceeds $13,800.
If the spouse is aged 65 to 69, he/she must meet the work test. Once the spouse turns 70, a spouse contribution cannot be accepted. Whilst these rules apply to the receiving spouse, there are no work, age or income conditions applying to the contributing spouse.
Note that the 2016 Federal Budget proposes to remove the “work test”, from 1 July 2017, for those aged 65 to 74 and consequently a spouse contribution will be able to be made for a non-working spouse up to age 74.
7. Co-contribution from the government of $500 for low-income earners
There aren’t too many handouts from the government – and despite being downsized over the years to only $500, the co-contribution remains one of them. If you have a low-income spouse or partner engaged in employment, or even an adult child working part-time who they may wish to assist, you should be aware of this government benefit.
The co-contribution is a contribution by the government to a taxpayer’s super fund (including an SMSF) when the taxpayer makes a personal super contribution, that they do not claim as an income tax deduction.
To access the co-contribution:
- The taxpayer’s income must be less than $50,454. The full co-contribution is available if the taxpayer’s income is below $35,454. Between $35,454 and $50,454 the maximum co-contribution is reduced by 3.333 cents for every $1 in excess;
- At least 10% of the taxpayer’s income must come from employment related activities or carrying on a business (i.e. self-employed);
- The taxpayer makes a personal (non-deductible) super contribution – the government matches this on a $1 for every $2 made, up to a maximum personal super contribution of $1,000; and
- The taxpayer must be under 71 years of age at the end of the financial year.
The maximum co-contribution is $500, which is made when a taxpayer earns less than $35,454 and makes a personal super contribution of $1,000. Income includes assessable income, reportable fringe benefits and reportable employer super contributions (most commonly, salary sacrifice amount).
8. Taking a pension – have you taken enough?
If you are taking an account-based pension (including a transition to retirement pension), make sure you take at least the minimum payment amount. There can be significant taxation costs if you don’t – potentially, the earnings on all the assets supporting that pension will be taxed at the full fund tax rate of 15%, rather than being completely exempt.
The minimum payment is a percentage of the account balance as at 1 July (i.e. 1/7/2015), and is fixed for the year, regardless of any changes in the account balance. If you commenced a pension during the year, it is a percentage of the account balance at the commencement, and pro-rated based on the number of days remaining in the financial year (except if commenced on or after 1 June when the minimum is set at zero).
Minimum payments are based on age at the start of the year (or age when commencing a pension during the year), and for 2015/16 are below.
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Also, where the pension is a Transition to Retirement Pension, ensure that you do not exceed the 10% maximum limit. Unlike the minimum pension, where a Transition to Retirement Pension starts part way through the income year, the 10% maximum pension payment is not required to be pro-rated. For example, a Transition to Retirement Pension that commences on 5 June 2016 with $400,000 will have a minimum required pension for 2015/16 of nil (as the pension commenced on or after 1 June in the income year), however, the maximum pension allowed will be $40,000, with no requirement to pro-rata.
It is also worthy to note that this 10% maximum limit for a Transition to Retirement Pension must take into account any PAYG Withholding in relation to a pension paid to a person under age 60.
Exceeding this 10% maximum limit for a Transition to Retirement Pension will result in all payments being treated as lump sum benefit payments and not pension payments. As a Transition to Retirement Pension usually consists of ‘preserved’ monies, any payments which will be treated as lump sum benefit payments will be in breach of the preservation rules. The member may be treated by the ATO as illegally accessing preserved benefits, which will result in all of the payments from the Transition to Retirement Pension being taxed at their personal marginal tax rate, regardless of tax components, age and with no 15% tax offset.
9. Make the pension payment by 30 June 2016
It is vitally important to ensure that pension payments meant for 2015/16 will actually count in the 2015/16 income year. Making a pension payment at the end of 2015/16 via electronic transfer can easily result in that pension payment not going through until after 30 June 2016 and consequently counting in 2016/17. The ATO has on several occasions outlined their view of the timing of pension payments, similar to their view on the timing of contributions, as outlined above. Make sure that you attend to the required minimum pension payment well before 30 June 2016.
10. Pension payment must be cash
It is the view of the ATO and APRA that a pension payment must be a cash payment and cannot be made in kind (also known as an ‘in-specie’ payment). This has, in the past, ruled out making in-specie pension payments. However, with the ATO issuing SMSFD 2013/1 and 2014/2 which confirmed that a partial commutation counts towards satisfying the minimum pension payment requirement, an in-specie payment from a member’s pension account can be effected by way of a partial commutation of the pension. Note, if the member is under age 60, the fund will require the cash to satisfy any PAYG Withholding requirements, see next.
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