There are two types of contributions that can be made to super: those that are tax deductible (concessional contributions) and those that are not (non-concessional contributions). Employer contributions are deductible and individual contributions are deductible if an election is made for the amount claimed.
Clients can make non-concessional contributions from after-tax income which hasn’t been claimed as a tax deduction. These include personal non-concessional contributions, spouse contributions and contributions for a child under 18. At a pinch, I suppose you could include the co-contribution and low-income superannuation tax offset. And, don’t forget from 1 July 2018, downsizer contributions can be made to super by anyone 65 and over who sells their main residence and qualifies.
There is no limit to the amount of contributions clients can make to super as a concessional or non-concessional contribution but too much will lead to tax trouble. The limit applying to concessional contributions is $25,000 which is taxed at 15 per cent. But, any amounts in excess of the $25,000 cap must be paid to the client and are taxed at his or her personal tax rate plus an interest rate penalty.
For non-deductible contributions the standard annual cap is $100,000. But for clients who are under 65 and have a total super balance of less than $1.5 million, access to the “bring forward rule” may be available. Someone with a total super balance of less than $1.4 million can access a cap of $300,000 which applies over a fixed three-year period. The “bring forward rule” commences from the first year in which a non-concessional contribution of more than $100,000 is made to super. A total super balance between $1.4 and $1.5 million allows access to two year’s standard contribution of $200,000 over a fixed two-year period starting in the year in which the standard cap of $100,000 is exceeded. Anyone with a total super balance of between $1.5 and $1.6 million can access only the standard cap each year irrespective of age.
Once a person’s total super balance gets to more than $1.6 million, non-concessional contributions cannot be made to super but if they are, they will always be excessive. This takes the shine out of making non-concessional contributions because of the penalties applying.
Exceeding your non-concessional contributions cap means you will be penalised and have a choice of withdrawing the excess and paying penalty interest amount or leaving it in the fund and having the excess taxed at a penalty rate of 45 per cent.
Salary sacrifice contributions are usually something you should set at the commencement of the financial year. They are difficult to adjust towards the end of the financial year if the employee needs to top up their deductible contributions. However, with the change to personal deductible contributions from 1 July 2017, the employee may be able to top up their concessional contributions out of their own savings and claim a deduction for them.
As there has been a drop in the amount of concessional contributions from 1 July 2017 it may prove worthwhile to review a client’s salary sacrifice agreement so that it reflects the concessional contributions rate of $25,000 rather than the higher rate that applied up until 30 June 2017.
Don’t forget that superannuation guarantee contributions made by a client's employer count in the concessional contributions cap of $25,000. As these contributions are virtually compulsory make sure they are considered if any salary sacrifice contributions are made which are over and above any SG contributions.
Legislation that is proposed to commence from 1 July 2018 will restrict amounts sacrificed under an employee salary sacrifice arrangement from not reducing an employer’s mandated superannuation guarantee contributions.
Spouse contributions can be an important addition to the superannuation savings of a client’s spouse. These contributions are not tax deductible and are counted against the spouse’s non-concessional contributions cap. However, if the spouse of a client is a low income-earning spouse, that is a spouse who has adjusted taxable income of less than $37,000, it is possible for the non-concessional contribution to be eligible for a tax offset for the contributing spouse of up to $540 for a contribution of at least $3,000.
Advisers should also be aware that any super member that has made after-tax contributions of at least $1,000 to superannuation and has an adjusted income of less than $51,817 (2017–18 financial year), is younger than 71 and meets certain employment and self-employment tests may be eligible for the government co-contribution of up to $500. Payment of the co-contribution is automatic as the ATO pays the amount to the client’s superannuation fund once it knows the amount of the after-tax contribution made by the client and they have lodged a tax return for the relevant year.
It can be a bit of a toss up as to whether the low-income spouse tax offset or the co-contribution provides the best outcome for some clients. This needs to be considered in the context of the overall benefit to the client’s superannuation balance.
The Low Income Superannuation Tax Offset
The Low Income Superannuation Tax Offset (LISTO) of up to $500 is available for tax deductible superannuation contributions for anyone who has an adjusted taxable income of no more than $37,000 where the amount of the tax deductible contribution is at least $3,330. The amount of the LISTO depends on the amount of tax deductible contribution made to the fund.
CGT small business retirement exemption
Clients who are in small businesses and have net assets of no more than $6 million or a business with a turnover of no more than $2 million may qualify for certain CGT small business retirement concessions on the disposal of the business or certain business assets. The calculation of what qualifies under these concessions is left up to the client or tax adviser as the current CGT threshold amount is $1,445,000 for the 2017–18 financial year. While there is no work test to rollover amounts that qualify under the small business retirement exemption once the client reaches age 65, they need to meet certain work tests to allow the payment to be made to their superannuation fund. Accountants or tax agents can help determine if clients qualify for the CGT small business concession and pay the amount to the superannuation fund without falling foul of other contribution caps.
Keeping an eye on your contributions
During the financial year you need to keep a watch on the amount of concessional and non-contributions your client makes to super to see whether any excess is likely to occur, and penalties applied. For concessional contributions, you’ll need to keep an eye on what the client’s employer(s) may have contributed including anything in their salary sacrifice agreement. For non-concessional contributions you’ll need to check on what the client has contributed this financial year as well as the last two years in case they’ve triggered the “bring forward rule”. And don’t forget that spouse contributions count against the spouse’s non-concessional contribution cap which can be restricted by their total superannuation balance.
Clients can make super contributions in many ways by cash, cheque, electronic transfer or transfer of a limited range of investments. Make sure the contribution reaches the fund by 30 June otherwise any late contributions cannot not be counted until the next year. This could result in an excess contribution and end up with an excess concessional or non-concessional contributions penalty being applied.
Start an income stream from the fund before 30 June.
Anyone who is at least 57, which is the current preservation age, can commence an income stream from 1 June this year and access the following advantages:
- Any income earned by the superannuation fund on the amount used to commence the pension is tax-free.
- There is no requirement to actually receive an income stream payment this financial year. Your clients can delay receipt of the income stream up until the end of June 2019.
- If the pension commences on 1 June this year and the member reaches 60 in the next financial year, any pension they receive once the reach 60 will be tax free.
Samantha who is 59 and retired commences an income stream in June 2018 with $800,000. There is no requirement for her to receive an income stream payment prior to 1 July 2018. Samantha’s birthday is on 10 May and if she delays receipt of her income stream until after 10 May 2019 time she will be 60 and the amount she receives will be tax-free to her. In addition, any income earned on her balance in the superannuation fund supporting her income stream will be tax-free from the time it commenced in June 2018.
Thinking about your client's SMSF at year end
End of the financial year is just as important for your client's SMSF as it is the for the rest of their financial affairs. There are a few important things SMSF practitioners need to make sure their clients have done by the end of the financial year for their SMSF. Things to remember are:
- Make sure the fund has received contributions by 30 June if they are intended to be counted for the members in the 2017–18 financial year;
- Make sure the investments can be valued at the end of the 2017–18 financial year especially if the client has investments in related parties that link to members or trustees of the fund;
- If members are using unallocated contributions accounts to enable twice the amount of tax deductible contributions to the fund, make sure the contributions are allocated in the fund correctly otherwise the client could end up with an excess contributions tax assessment. The accountant should let the client know how these rules work as there are some tricks of the trade that clients need to understand.
- If pensions are being paid to fund members make sure the minimum pension will be paid by 30 June otherwise the pension may not meet the standards and the fund could end up paying unnecessary tax.
- If pensions have been commuted during the year that the pro rata minimum has been paid.
- If just one member of the SMSF has a total superannuation balance, as at 30 June 2017, greater than $1.6 million the fund will require an actuarial certificate irrespective of whether the segregated or proportional method is used to calculate the fund’s exempt income.
The super changes mean a new set of rules to consider for the 2017–18 financial year, whether it’s the concessional and non-concessional contribution caps, tax deductions, getting pension payments right or getting an actuarial certificate for the first time. Advisers should make sure they know what’s required to squeeze the maximum benefit out of the changes for their clients.
Graeme Colley, executive manager, SuperConcepts