Superannuation Contributions

Putting money into super is not as easy as simply writing a cheque to your Self Managed Super Fund (SMSF).

Laws exist to restrict those who can contribute to superannuation and benefit from the long-term taxation advantages that super can provide.

There are two basic ways to contribute, each with their separate rules.

They are by way of employer contributions and personal contributions.

Employer contributions

As the name suggests, these are paid by your employer and usually amount to a standard 9% of your pre-tax salary. If you are gainfully employed, your SMSF can receive these employer contributions no matter your age.

You may be able to request that your employer increase the amount of super they pay you. This is called salary sacrificing superannuation contributions.

Your employer literally increases your super but reduces your salary.

People who are close to retirement like to salary sacrifice to boost their super balance in their final years of working.

Employer contributions are taxed at a flat rate of 15% in your SMSF.

Member contributions

A member can contribute to their SMSF whether they are working or not. The only condition is they must be under 65.

This is particularly useful for families where one parent has spent time out of the workforce or has not worked due to family commitments.

It allows people to personally boost their retirement balances at a time that suits their circumstances.

Concessional member contributions are taxed at a flat rate of 15% in your SMSF.

Are contributions tax free?

These member non-concessional contributions are tax free in the SMSF as long as a deduction is not claimed personally.

A member can claim a deduction for their contributions in limited circumstances. Basically, they must not earn more than 10% of their income from working.

In practice they are commonly people who are substantially self-employed or self-funded investors.

People might “accidentally” fall into this category as well. This can happen when a person makes large capital gains or receives large trust distributions.

This extra income can tip them into being eligible to contribute and deduct from those contributions.

Contribution caps

The superannuation laws have changed substantially since they were first introduced in 1993 and are likely to continue doing so. One recent important change is the introduction of contribution limits.

This coincided with the cancellation of some penalty taxes on excessive benefits in retirement.

To find out more about contribution caps or for specialist advice relating to your SMSF, please enquire online today and we can help you with your super fund.

What are concessional contribution caps?

A member can currently only receive up to $30,000 of concessional contributions per year across all their funds with those 50 and over have a higher limit.

If they receive more, then the cash can stay in the fund, but the member is personally liable to pay an additional excess contributions tax of 34.0%. However, you can request that your SMSF pay this for you.

It’s no surprise that the total tax in this situation matches the highest possible tax rate. The ATO is saying: if you contribute too much we will cancel any tax benefit.

This isn’t so bad for some people though. Some are happy to wear the extra tax if they can add as much as possible to their super fund.

For example:

  • A taxpayer on $300,000 tells their employer to salary sacrifice $100,000 into their super fund. This is in excess of the cap.
  • The member incurs excess contributions tax, but the member would have paid top tax on the income anyway.
  • As they have spare cash too, they pay the bill personally.
  • They reach their goal of leaving the $100,000 in the fund ($85,000 after tax).

What are non-concessional contribution caps?

Currently, members are currently only entitled to receive up to $180,000 of non-concessional contributions per year, across all their funds. This figure rises to $540,000 if you elect to “bring forward” your cap.

This means you can contribute $540,000 this year, but none in the next two years.

If you receive more, then the cash can stay in the fund, but the member is personally liable to pay an additional excess contributions tax of 49.0%. However it is possible for your SMSF to pay this for you.

Want to find out more about what taxes apply to a SMSF? Please enquire online. Our team has the experience and knowledge to ensure that your SMSF complies with their taxation obligations. Speak to us today!

What if you breach both caps?

If you breach the concessional contributions cap, you are liable for an excess contributions tax of 34.0%.

What many people may not realise is that the excess contribution amount is then counted toward your non-concessional limit.

So if you have already contributed your maximum non-concessional contributions the original excess is taxed again at 49.0%.

Yes, you are reading correctly! – that makes the total tax 98%! (15% in the fund, 34.0% on the original excess and 49.0% on the additional excess).

The point here is that the Australian Taxation Office (ATO) does not want you to contribute one dollar more than the allowable amount. If you do, they will take that dollar!

Examples of breaches

A breach may typically occur as follows:

  • A fund member like you has an SMSF, a family company and also does some part time work.
  • Their accountant recommends that they contribute the maximum employer and member contributions.
  • Their part time employer still pays their 9% super, as required.
  • Unfortunately, this amount is gobbled up in excess contributions tax as both limits are breached.

An even worse situation has happened to some:

  • A member is approaching retirement and gets their employer to contribute the maximum concessional limit. They also personally add their maximum $150,000 contribution to the fund.
  • On one occasion an additional $1 contribution is made which goes unnoticed and triggers the bring-forward cap in that year. They can now only contribute $249,999 over the next two years ($450,000-$250,001).
  • The member is reaching the age of 65 in the next year and contributes the bring-forward amount of $450,000.
  • Unfortunately they already triggered that cap and the contributions are now excessively over the remaining limit.

What you should know!

A recommendation for all members is that they consolidate their entire super balances into their SMSF if they want to know exactly which contributions have been made for them and when.

Your SMSF specialist has to keep an eye on these matters. The ATO will not allow you to refund all of the excess contributions except in extremely limited circumstances.

To ensure that your SMSF is managed properly, please contact our experts or enquire online today.

Note: this website is for informational purposes only and should not be substituted for professional financial or taxation advice.