Contributing factors

There are many parameters governing how contributions can be made to an SMSF. Smarter SMSF technical and education manager Tim Miller points out they all need to be considered when looking to build retirement savings.

While the 1 July 2022 legislative changes opened up the contribution landscape considerably with the removal of the work test for personal contributions prior to age 75, other factors, such as the transfer balance cap and the proposed Division 296 tax, mean contributions shouldn’t be made just for the sake of it. Rather, they should be made looking at the end game to determine how much members think is appropriate to fund their desired retirement income needs, but also what strategies are appropriate based on family circumstances.

This article highlights a number of contribution strategies SMSF members have available to them that are enhanced when indexation occurs. Further, we will contemplate how some strategies may not be appropriate in all family circumstances.

Contribution acceptance rules

The Superannuation Industry (Supervision) (SIS) Regulations outline the requirements for the acceptance of contributions and the Income Tax Assessment Act primarily defines the types of contributions, as well as the caps that apply to avail them to concessional tax treatment.

Table 1 outlines the rules for accepting contributions.

A fund may also accept contributions made in respect of a member, received on or before the day that is 28 days after the end of the month in which the member turns 75 years, that are:

• employer contributions other than mandated employer contributions, or

• member contributions other than downsizer contributions.

Longer timeframes for making contributions

The extension to age 75 provides a great opportunity for certain contribution strategies, such as recontribution strategies, as it intertwines directing money into super during the drawdown stage. While recontribution strategies are reliant on satisfying certain conditions of release, including attaining preservation age, other strategies targeting rebalancing between spouses can commence earlier via contribution splitting.

Some strategies are contemplated for the purposes of redistributing wealth between members and others are used to minimise tax for non-tax dependent beneficiaries in receipt of death benefits.

Indexation

The indexation of the concessional contributions cap from 1 July 2024 will be influential as it will impact carry-forward unused concessional contribution strategies, contribution reserving, contribution splitting and, importantly, the non-concessional contribution limit and by extension the three-year bring-forward limit.

Impact of indexation on bring-forward amounts

When the concessional cap is indexed, this results in the non-concessional contribution cap also increasing as the standard non-concessional cap is four times the concessional cap. With the nonconcessional contributions cap being indexed from 1 July 2024 and the general transfer balance cap remaining at $1.9 million, this will reset the bring-forward limits as in Table 2.

There are hazards linked with the indexing of the non-concessional cap, particularly where a member is part way through a live bring-forward period. Individuals cannot use the increase in the non-concessional cap until any existing bring-forward period expires.

Example

Stefanie had a total superannuation balance of $1.3 million at 30 June 2022 and made a $125,000 non-concessional contribution in the 2023 financial year. This triggered her bring-forward and given her balance, it gave her an entitlement to the entire three-year period, which runs across 2022/23, 2023/24 and 2024/25. Stefanie doesn’t have the cash flow during 2023/24, but comes into some money early in 2024/25. Despite the non-concessional cap increasing to $360,000 for three-year bring-forward purposes, Stefanie is only entitled to contribute a further $205,000 up until 30 June 2025, taking her total to $330,000, not $360,000.

Recontribution v spouse contribution

This is one of the more significant family dynamic-based considerations. A single-member fund has no direct need to undertake a recontribution strategy, however, given the likelihood all beneficiaries will be either non-tax dependants and, in some instances, non-dependants, there is some value in rebalancing taxable and tax-free components. For couples without children, the primary reason to consider moving money from one spouse to the other is to maximise exempt current pension income once the members move to retirement phase.

In your traditional nuclear family, both strategies are appropriate as there may be some rebalancing requirements, but also some taxable component rebalancing requirement. The death of member one will often result in member two receiving the benefit in the form of a pension, meaning the greater the tax-free component that can be transferred to them the better.

The blended family, however, may not be the appropriate structure for spouse contributions. If a two-member fund blends families together, then estate planning is critical and a spouse contribution of considerable size may be problematic if wanting to leave benefits to a child from a previous marriage. So while a couple may be looking at strategies from the angle of their respective transfer balance caps, they also need to think through to the estate piece.

The concessional contribution strategies can be divisive and while there are some great indexation-based opportunities, once the discussion turns to contribution splitting, the nuclear versus blended family discussion is relevant again.

Carry-forward unused concessional contributions

With the ability to carry forward unused concessional contributions from 1 July 2018, we have now reached the milestone where everyone, with a total superannuation balance below $500,000 at the most recent 30 June, has the capacity to use the full five years’ worth of unused amounts. Noting the rules provide for the current year cap to be used first and then unused amounts from year one of the rolling five-year period to be used next, individuals should be looking at their 2018/19 contributions to, at the very least, see if they have cap space they can use rather than lose.

There is no requirement to wait the full five years, it can be used incrementally, and is also available to those who couldn’t make contributions in prior years. While ATO private rulings issued can’t be relied upon by other parties, a recent one confirmed an individual who had come to Australia in 2017 on a partner’s visa, and had not commenced working and contributing until 2021, could carry forward the unused cap from 2018/19 despite not working at that time.

Managing the total superannuation balance is critical and one strategy that can legitimately assist with this is contribution splitting, albeit that splitting won’t impact the splitting spouse’s total super balance until the following 30 June.

Contribution reserves

The concept and benefits of contribution splitting were discussed in last quarter’s article, “Evening up the score”, however, as a reminder only concessional contributions can be split to the contributing member’s spouse. That spouse must be under preservation age or between preservation age and 65 and not retired.

The maximum amount that can be split is the lesser of 85 per cent of concessional contributions made during the previous year, or current year as discussed below, and the member’s concessional contribution cap. The concessional cap is subject to the member’s total superannuation balance and previous unused carry-forward cap.

Contributions splitting applications must be made in the year following the contribution, however, the application and process can occur in the same year as the contribution if the entire member’s benefit is being paid out during the financial year.

Contribution reserving

Contribution reserving is the practice where members use the SIS contribution acceptance and allocation rules to get a tax benefit in year one by claiming a tax deduction in that year and then allocating the contribution to the following year, or year two, for cap purposes.

Ultimately the strategy relies on the ability in the SIS Regulations that provide for a contribution to be allocated within 28 days following the end of the month it is received. The ATO, via Taxation Determination TD 2013/22, indicates contributions are deductible in the year they are received, but for cap purposes cannot be counted twice. So for certain contributions, that is, those made in June, they must be counted in the year they are allocated, which can be either year one or year two. This created an anomaly in the event that they were allocated to year two as the contribution needed to be reported in the fund income tax return in the year of receipt to be recognised for deduction purposes.

The result is the regulator has created a process whereby the member, having entered into a legitimate strategy to make a contribution in June for deductibility purposes, would request the ATO to reallocate the contribution to the following year to avoid excess concessional contributions issues arising. The strategy relies on the fund trustee documenting the acceptance of the contribution in June and then documenting the allocation of the contribution in July and the lodgement of the application to reallocate the contribution by the member with the ATO.

With the indexing of the concessional cap to $30,000 from 1 July 2024, this strategy would allow an individual to potentially claim a significantly higher deduction in 2023/24 knowing they have less capacity to contribute in 2024/25.

Example

Michael is 67 and still self-employed and makes a concessional contribution of $27,500 in April 2024. In addition to his employment income, he also sells some shares that will result in an increased personal tax liability. Michael contributes a further $30,000 in June 2024. He then lodges his notice of intention to claim a deduction, claiming $57,500 ($27,500 + $30,000) with his fund. At the same time, the fund records it has received the contribution in June and that the amount will be held in reserve to be allocated no later than 28 July 2024. For accounting purposes, the fund simply records the contribution against Michael’s account. In July, the fund prepares further minutes to allocate the contribution to Michael. Despite the record-keeping, the financial statements will reflect the contribution in both the income and member statements. Michael must lodge the request to adjust concessional contribution form with the ATO, preferably at the time he lodges his personal return.

Is there a right amount to contribute?

This is going to be different for everyone and every SMSF is going to set different objectives, which they hope to achieve via a carefully constructed investment strategy.

Regularly reviewing the fund’s strategy means regularly reviewing the contribution strategy. It also means regularly reviewing each member’s estate plan to ensure their contribution, and ultimately pension strategies, help them achieve their and their beneficiary goals.