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Self Managed Super Fund (SMSF) Article
Making Large Undeducted Contributions

By Tony Negline.

This article may be out of date.

28th June 2006

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Superannuation undeducted contributions are contributions that have not been claimed as a tax deduction.  In other words they are made with after tax money by the member.

Until the last Federal Budget an investor could put any amount of undeducted contribution into super they wanted to.  Some people were lucky enough to take advantage of this rule and made very large undeducted contributions.

As part of its new super policy the government decided to limit the amount of undeducted contribution that could be made.

At a basic level the contribution rules are as follows:

These rules mean that an investor could contribute $150,000 between 9 May and 30 June 2006 and then contribute $450,000 during the 2006/07 year.  The impact of the $450,000 is that additional undeducted contributions will not be permitted until 1 July 2009.  Some couples might find this a useful strategy because it means they could contribute $1.2 million over a relatively short period.

Alternatively a person could contribute $450,000 between 9 May and 30 June 2006.  Implementing this strategy would mean that new undeducted contributions could not be made until July 2008.

If these rules are broken then the excess contributions will be returned to the investor and a notional amount of earnings will be taxed in the investor's hands.

Before anyone makes large undeducted contributions it is important that they fully understand the above rules and potential problems with these rules:

So what should an investor do?  One argument says that they should do whatever they like because ultimately the worst penalty they can face that can happen is the refund of the contributions and some penalty tax.  This line of reasoning says that political pressure might force the government to amend the above rules and allow some additional flexibility.

But what should an investor do if they do not want the hassle of falling foul of these new rules?  They should probably seek very good advice and know that there is some risk that they may have some of their contributions returned to them.

Many people have been asking when can we expect to see the final make-up of these new rules.  Unfortunately we do not expect to see final rules until sometime in 2007.

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

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