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Self Managed Super Fund (SMSF) Article
Three-year contributions rule can be a triple treat

By Tony Negline.

This article may be out of date.

11th August 2010

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It's commonly known that investors aged under 65 can make up to three years of non-concessional contributions in advance.

Non-concessional contributions include personal super contributions that have not been claimed as a tax deduction, contributions made in a financial year that exceed an investor's concessional contribution cap and some contributions made with proceeds from the sale of a small business.

It's worthwhile looking at this advance rule in some detail because it can get a little confusing.

Super investors under 65 do not have to satisfy any work test to make these contributions.

This special rule only kicks in when a person contributes more than $150,000 in non-concessional contributions in the first year of a three financial year period.

This means that over a three year period the maximum that can be contributed before penalty tax applies is $450,000.  Amounts above this threshold are taxed at 46.5%.

The first time that any investor could have commenced a three financial year period was for contributions made on or after 1 July 2007.

Lets look at an example.  Joanne is aged 50 and wants to know how much non-concessional contributions she can make this financial year.  In the 2007/08 financial year she made $200,000 in non-concessional contributions.  In 2009/10 she made $250,000.

Some people assume that in this example you only look at what occurred in the 2009/10 financial year and ignore what occurred before that period of time.

If you make this mistake then you would conclude that Joanne can only contribute $200,000 in the 2010/11 financial year.

In reality Joanne's three financial year period commenced on 1 July 2007 because in that year she contributed more than $150,000 in non-concessional contributions.  This means that this three year period finished on 30 June 2010.

Therefore a potential new three year period commences on 1 July this year.  Joanne is actually free to contribute $450,000 in non-concessional contributions in the 2010/11 financial year.

Technically this three financial year rule applies to anyone who is aged under 65 at the start of a financial year.

Once an investor is aged at least 65 the three year in advance rule disappears and only $150,000 in non-concessional contributions can be made in a financial year before the 46.5% penalty tax will apply.

The work test says that a person must be gainfully employed for at least 40 hours in any consecutive 30 day period during the financial year.  Super contributions cannot be made before this work test has been satisfied.

What does gainfully employed mean?  Employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment.

If aged at least 65 but less than 75, contributions above the $150,000 limit in a financial year will incur excess non-concessional contributions tax will be applied at 46.5%.

This rule applies until a person turns 75.  That is, once a person turns 75 no further contributions are possible.  (The Henry Tax Review did suggest that this contribution limit be removed however neither the Labor Party nor Coalition have formally responded to this idea.)

So how does the three year in advance rule fit in with age 65?  Suppose a person is aged 64 on 1 July 2010.  Assume that the 2010/11 financial year is the first year in a potential three year non-concessional contribution period.

If the person contributes $450,000 at any stage during 2010/11 then the three year contribution period will begin.  Assume no other non-concessional contributions will be made in the 2012 and 2013 financial years.

The three year bring forward rule is okay because total non-concessional contributions over the three year period is up to $450,000.  Excess non-concessional contribution tax will not apply.

Clearly some of these contributions apply for a periods of time when the investor will be over age 65.  Does the work test need to be satisfied for the contributions made when the investor was 64?  The short answer is no.  The super rules do not demand that a person satisfy this gainful employment test for contributions made in this instance.

However lets now assume that the person contributes $250,000 of non-concessional contributions in the 2011 financial year and intends to contribute the remaining $200,000 allowed over the following financial years.  In this instance because contributions will be made in financial years when the person was over age 65 at the start of those years, the work test will have to be satisfied and the $150,000 limit will also apply to those contributions.

In effect the three year rule applies until a person is aged at least 67 at the beginning of a financial year.

The general rule of thumb for those people aged under 67 on 1 July 2010 is as follows – consider the contributions that were made in the previous two financial years.  You need to carefully determine in which financial year the three year in advance rule actually commenced.

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