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Self Managed Super Fund (SMSF) Article
The new contribution rules

By Tony Negline.

This article may be out of date.

8th May 2007

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Now that the dust is beginning to settle on all the formalization of the government’s July 2007 super changes, now is a good time to review all the rules that will allow super contributions to be made.

It is worth noting that since the Superannuation Industry Supervision rules were introduced in July 1994 there have been 53 changes to the regulations controlling when superannuation contributions could or could not be made.

It is important to point out that the rules allowing contributions have had anything to do with the taxation of contributions in a super fund or any tax concessions the contributor may be able to claim.

Under the new super regime there are 12 broad rules that allow super contributions.  Many of these rules are intertwined.

The first rule applies to those who are under 65 and allows super contributions for these investors at anytime by anyone.  If a person was 64 at the start of a financial year then the maximum amount of member contributions a fund can accept is three times the “non-concessional contributions cap”.  This cap for the 2007/08 financial year is $150,000 which means a fund cannot accept member contributions greater than $450,000 in that year.  Certain payments are exempt from this threshold, in particular, contributions made from structured settlements or orders made for personal injuries, proceeds from the sale of certain small business assets, any Government co-contribution payments and some employments termination benefits.

One of the more controversial elements of the government’s super changes involves Tax File Numbers.  From July 2007 it will be illegal for super funds to accept members contributions unless the fund already has the member’s TFN, is told this number at the time the contribution is made or receives the TFN no later than 30 days after the contribution was made.

For super fund members aged at least 65 but under 75 a different set of rules apply.  In order for contributions to be made the investor must first satisfy a work test.  The person must be gainfully employed for at least 40 hours in less than 31 days.  Sometimes it can be difficult to determine if someone has satisfied this definition.  For example is unpaid charity work that gives a good feeling acceptable?  Is minding the grandkids okay even when the arrangement is informal and payment is sporadic?

The definition of gainful employment talks about “gain or reward” which seems to imply that something tangible, but not necessarily money, is received.  To the best of our knowledge there has been no judicial decision on what this definition means.  Equally the super regulators have not provided much advice on what they believe the term means.  The net result is that most investors who have to deal with the confusion find it extremely unsettling.

Super investors who are just about to turn 75 need to be careful.  A fund will not be allowed to accept a contribution if it is paid more than 28 days after an investor’s 75th birthday.  Contributions beyond age 75 are not permitted.  We have been asked if the government will increase this age limit.  It would seem logical that with increasing life expectancies it is only a matter of time.

A recent change announced by the government will impact those who were 64 at any time between 10 May 2006 and 5 September 2006.  Ordinarily these people would need to satisfy the gainful employment test if they wished to contribute after reaching age 65.  The government has decided that these investors will be allowed to contribute without satisfying the gainful employment test.  This means that they can take advantage of the $1 million contribution opportunity which closes on 30 June this year.

In a similar way those aged 74 between 10 May ’06 and 5 Sept ’06 will be able to contribute to super as long as they were gainfully employed for at least 40 hours in less than 31 days during either the 2005/06 or 2006/07 financial years.

From 1 July 2007 access to the Government Co-contribution will become a little easier.  Currently it is possible for employees to receive this additional super contribution if their assessable income for tax purposes and employer provided reportable fringe benefits are less than $58,000.  The maximum co-contribution is paid if total remuneration is less than $28,000.  On 1 July these thresholds will be indexed by movements in average weekly earnings.  At this stage we do not know the new thresholds but they will be approximately $29,000 and $59,000.

Also from 1 July it will be easier for those non-employees to receive the co-contribution because the test will only demand that at least 10% of assessable income and reportable fringe benefits comes either from running a business or employment.

The final contribution rule change concerns spouse contribution splitting which move super contributions from your super account to your spouse’s account.  This can currently be applied to either all personal or 85% of employer contributions.  From 5 April 2007 this will not be allowed for any personal contributions made after that date but will continue to be permitted for up to 85% of employer contributions.  The government believes that this change will make life easier for super fund administrators.

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