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Self Managed Super Fund (SMSF) Article
New Super Contribution Rules

By Tony Negline.

This article may be out of date.

30th April 2008

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There are two activities retirees frequently want to do in relation to super.  They want to get money into the system and they want access to that money as soon as possible.

Both activities involve similar rules that are applied in distinct ways.

In this article we'll look at some aspects of the contribution rules.  Anyone under age 65 can make super contributions or can have contributions made for them.  This rule applies for any contributions that are personally made by the investor or for them such as by an employer.

Contributions made from an investor's personal funds that are not claimed as a tax deduction used to be called Undeducted Contributions.  Their new term is Non-concessional Contributions because there is no tax deduction (ie a concession) allowed on the contribution.

There is no limit to the size of non-concessional contributions that super fund members aged under 65 can make.

Non-concessional contributions up to $150,000 can be made each year aren't  taxed in the fund.  Alternatively up to three years of these contributions, that is, $450,000, is allowed in advance and also aren't taxed.

Non-concessional contributions made above these limits are taxed at the highest personal  income tax rate plus the Medicare Levy.  This rate is currently 46.5% and is likely to remain at this level for several more years.  This tax obligation is levied on the individual taxpayer.  Once this income tax liability is sent to the investor, they have 21 days to pass it onto their super fund or they will have to meet this liability out of their own resources.

Under the super laws a super fund cannot accept a non-concessional contribution if the member  hasn't given the fund their Tax File Number.  If the member quotes their TFN within 30 days after the contribution has been made then the contribution doesn't need to be returned.

A super fund must also not accept a single contribution which is greater than $450,000 during a financial year for those under 65.  What happens if the member contributes more than $450,000 in one financial year but does this over several contributions?  The tax office has issued an Interpretative Decision (2007/225) which says that the excess contributions made to a Self Managed Super Fund over several contributions don't have to be returned.  This ATO ID says that a super fund may accept additional contributions even if the fund knows they are above the relevant threshold.

Why would anyone want to make a non-concessional contribution to super that was going to be taxed so heavily in the year it is going to be made?  Super funds have only two flat tax rates – 15% and 0%.

The latter rate applies to assets being used to pay a pension.  The former applies to all other assets.  In a minority of cases some high net worth people are receiving so much income that they will be paying 46.5% on their income and it may make sense to pay a tax penalty upfront so that tax liabilities can be reduced longer term.

DIY Super's analysis shows that the pay off for a 15% tax rate could be over 20 years but for a 0% tax rate the pay off period may be 5 years if the money is invested in assets paying franking credits.  By pay-off we mean that the strategy of paying a large tax bill when making a super contribution upfront generates a bigger asset compared with holding it personally and paying higher tax rates on the investment.  If there are no franking credits available then the pay off period is even longer.

Many wealthy people have structures which reduce their tax bills from year to year.  Often these structures merely delay the payment of tax and the day of reckoning cannot be avoided.  Perhaps therefore it might be better to pay some tax now and reap longer term benefits.

Everyone on this situation should do some good number crunching and receive some very robust advice.

Those aged at least 65 but under 75 can only make contributions once they have satisfied a work test.  This test says that the investor must perform an activity over 40 hours in less than 31 days and receive a tangible benefit for that activity.

This work test must be performed each year that a person in this age bracket wants to make a super contribution and must be done before the contribution is made.  Unfortunately people in this age bracket may only contribute $150,000 in Non-concessional contributions each year.  The $450,000 advance contributions are not available.

These contributions must be made 28 days after the end of the month in which the persona turns 75.

How could a person prove that they are working?  If the investor is working for an arm's length employer then it can be fairly easy to keep records.  Once the arrangement takes on a more personal nature, such as managing investment properties or minding grandcildren, it can become more difficult.  Keeping diary notes of work down and activities performed over an extended period may be essential.  Simple bona fide compliance with this requirement is often the best course of action.

What about people aged at least 75?  Unfortunately no further personal contributions are available.

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