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Self Managed Super Fund (SMSF) Article
Revamped Super Contribution Rules
By Tony Negline.
This article may be out of date.
25th October 2006
If you’re like most Australians, you probably use only a small amount of your spare time to think about superannuation. One problem with this approach is that as the government often changes the super and tax laws you can easily miss rule modifications that affect you.
This is certainly true of the proposed new super laws. Over the last few months we have received many questions seeking confirmation about how the new rules are intended to work and what their ultimate impact might be. Probably the biggest area of confusion is the new contribution rules.
Before we look at these proposed new rules it is important to point out that the new rules will not be finalised for sometime. Moreover the legislative process is not a perfect science and often it takes at least three years before the full impact of a new set of rules is fully understood. All this means that we can only speak in generalities.
Now lets turn to the rules. The government does not intend to alter the eligibility rules that allow an investor to make a contribution. Generally a person under 65 can contribute to super at any time and anyone can contribute to super for that person. A person who is at least 65 years of age but under 70 can contribute – or can have contributions made for them – to super if they work have worked for more than 40 hours in less than 31 days. A person aged at least 70 years of age but under 75 can contribute to super if they satisfy the same test. Contributions are not allowed for those aged at least 75.
There are two points to note: firstly, the work test must be satisfied before contributions can be made and, secondly, only personal contributions can be made for those at least 70 but under 75.
It is now time to review the different types of contributions that can be made. It is here that the government intends to make some very significant changes.
We will look at undeducted contributions first. Between 10 May 2006 and 30 June 2007, all investors will be allowed up to $1 million in undeducted contributions (those people aged at least 65 but under 75 during this period will need satisfy the work test mentioned). Many people are wondering if they should borrow funds to take advantage of this opportunity. Care should be taken to make sure the numbers add up.
From July 2007 onwards undeducted contributions will be limited to $150,000 however investors under 65 will be allowed to contribute three years of undeducted contributions – that is, $450,000 – in advance. This means that someone could do $1 million before July 2007 and $450,000 after June ’07.
People aged at least 65 but under 75 will not be allowed to use the three years in advance rule. The $150,000 and $450,000 contribution limits will be indexed each year but under new rules which we will not look at here.
Contributions in excess of these thresholds amounts will be taxed at 46.5%. Under the government's original plan these were to be refunded to the investor with penalty tax on the deemed amount of the earnings. The ATO will have the ability to deem that a contribution which breaches the above limits is not subject to excessive tax.
Special rules will exist if undeducted contributions are being made with the proceeds from a permanent disablement settlement or the return of capital due to the sale of a small business that satisfies certain conditions.
What about tax deductible contributions? From July '07 onwards, there will be no limit to how much a person can claim as a tax deduction. Contributions of up to $50,000 (indexed each year under a rule that we will not examine here) will be taxed at 15% in the super fund. Contributions above this threshold will be taxed at the highest marginal rate – that is, 46.5%.
Assuming all other contribution rules are satisfied, investors aged over 50 at any stage after June 2007 and before July 2012 will be allowed a maximum deductible contribution limit of $100,000 for each full financial year that the person is over 50.
For example, an investor who turns 50 in Sept 2010 will only be allowed this increased limit during the 2011/12 year.
This $100,000 limit will not be indexed. For investors in this age bracket amounts above $100,000 will be taxed at the highest marginal rate. This will be an important rule to understand. From July 2012 onwards people who were able to access this rule will revert to the $50,000 limit that applies to everyone else.
The above thresholds will apply for both employer and personal tax deductible contributions.
How will the excess tax be collected? It will be an investor's liability but they can ask super funds to pay it for them.Now the most difficult question in relation to these new contribution rules: if you want to contribute a significant amount to super are you better to breach the undeducted contribution threshold or the deductible contribution threshold? This is a very complex question and some clear analysis is required which we will provide in a future column.
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.