SMSF STRATEGY GUIDE
SMSF CONTRIBUTION TYPES
There are many different types of contributions that can be made to a SMSF, which at first glance can appear complex. To simplify it, understand that contributions to a SMSF fall into only a few broad categories , with a variety of sub categories within these. The following article outlines these categories.
Concessional contributions are those contributions made into your SMSF whereby someone (either the member or the member’s employer) is claiming a tax deduction for the contribution. Concessional contributions will then generally also form part of the assessable income of the fund and be taxed at 15%. These contributions are limited each year by what is known as the concessional contributions cap.
There are a variety of sub-groups of contributions that fall into the category of Concessional contributions, as follows:
Mandated employer contributions
Mandated employer contributions are generally known just as employer contributions. Most people are aware of the fact that their employer has to contribute a certain percentage of their salary to their super fund. These are known as superannuation guarantee contributions (SGC). Apart from SGC, this can also include SGC shortfall payments, contributions related to an award or certified agreement, and payments from the Superannuation Holding Accounts Reserve. Note that your SMSF can accept these contributions at any time, regardless of the age of the member or hours worked at that time.
Salary sacrifice contributions
This is another contribution type that is fairly well known. It consists of contributions made by an employer to your member account over and above the SGC obligations we mentioned above. The concept of salary sacrifice is fairly simple. Instead of you receiving these amounts as salary and paying your marginal tax rate, these amounts are instead contributed to your SMSF account and in turn form part of the assessable income of the SMSF with a tax rate of only 15%.
Personal deductible contributions
These are personal contributions of yours into your SMSF, where a tax deduction is claimed by you for the contribution amount. Historically these have been used predominantly by self employed people. Note that a notice of intent to claim the deduction has to be completed for these types of contributions.
'Unreasonable' allocations from existing reserves
Whilst the ATO has been clear recently that they do not believe reserves are generally appropriate or necessary in a SMSF, some SMSFs may have existing reserves where allocations will need to made to member’s accounts at some point. If these allocations are made within a particular set of rules, then the allocations are not treated as concessional contributions. However, if they are outside of these rules and are hence deemed “unreasonable”, then they will be treated as concessional contributions.
Non concessional contributions are those contributions made into your SMSF whereby no one is claiming a tax deduction for the contribution, and hence there is no tax levied on the contribution. These contributions are limited each year by what is known as the non-concessional contributions cap. There are some sub-groups of contributions that fall into the non-concessional contribution category, as follows:
These are contributions you make to your SMSF with after tax money, where no one is claiming a tax deduction for the contribution.
Eligible spouse contributions
These are contributions that are made into a SMSF member account by the spouse of that member. The receiving spouse needs to be under the age of 65, otherwise if aged between 65 and 70, the receiving spouse needs to meet the work test (40 hours in any continuous 30 day period). There is no age limit or work test for the spouse making the contributions. Note these contributions cant be made for a spouse age 75 or over.
The Government co-contribution is an incentive to help lower to middle income SMSF members boost their personal super fund contributions. If you are eligible, the Government will contribute 50c for every dollar of personal non-concessional contributions you make, up to a limit of $500 (so you would have to make a $1,000 contribution to get the full $500 co-contribution, but you don't have to do the maximum).
To be eligible, you need to:
- be less than age 71 at the end of the financial year
- have made at least one personal super contribution during the financial year
- have lodged your tax return for the year
- have not gone over your non-concessional contributions cap
- have adjusted taxable income of less than $53,564 (2019/20)
- have 10% or more of your total income come from employment or carrying on a business (or a combo of both).
Maximum co-contribution is available for those earning less than $38,564 (2019/20 year). Th co-contribution amount reduces down from 50c in the dollar as income increases, and stops altogether once income is $53,564 (2019/20 year).
The downsizer contribution is a new type of contribution that can be made from 1 July 2018. It is aimed at older Australians who release capital from downsizing their home, but may be over age 65 and not meet the work test. It enables them to get capital into super that they otherwise would not be able to.
The rules around downsizer contributions are as follows:
Contribution must be made after turning age 65
Must be made within 90 days of receipt of funds
Amount is limited to $300,000 for each spouse (or $600K for a couple).
Its fine for each spouse to make contributions, even if house was only in one name
Property must have been owned for at least 10 years
Only applies to sales after 1 July 2018
It is a once-only contribution
No need to actually buy another property
Does not interfere with any other contribution rule, and does not count as a non-concessional contribution.
No work test is applied
Property sold needs to have been the primary residence of the individuals at some point in its ownership
CGT SMALL BUSINESS CONCESSIONS
The CGT small business concessions were provisions that were introduced by the Government to recognise the fact that for many small business owners, their business was effectively their "super", and hence they did not have the benefit of the many tax benefits that employees may have had over many years. There are of course some eligibility conditions with regard to things like your business turnover and net asset value etc to ensure you meet the definition of a small business.
Now the small business CGT concessions are a complex subject of their own. The reality is that on the sale of a business or business assets, you should be getting advice from your accountant or adviser on the application of these provisions.
However, we will highlight a few areas to be aware of if you are a farmer or small business owner in this category.
The first concept to be aware of is that SMSF members have what is known as a CGT cap with a lifetime limit of $1,515,000 as at the 2019/20 year (its indexed each year) – this is an amount that can be contributed in addition to the non-concessional caps for certain contributions under these small business CGT provisions. This includes amounts under provisions known as the ”15 year exemption” and the “retirement exemption” which itself has a limit of $500,000.
Again, if you are selling a business or assets of the business, get professional advice on this one to ensure you are using all the small business concessions available, which may include these contributions to your SMSF.