Seven key contribution considerations

There are seven key components individuals must observe when looking to make contributions into an SMSF, Graeme Colley SMSF technical and private wealth executive manager at SuperConcepts writes.

There is more to super contributions than just the amount your clients are going to make. There are many considerations, including the timing of the contribution, who made it and the reason for doing so. This article covers seven critical things to remember when contributing to super.

Meeting the work test

Until 30 June 2022, anyone aged 67 or older was required to meet a work test of 40 hours in 30 consecutive days prior to either making a personal contribution or an employer making salary sacrifice contributions. The work test must have been satisfied in the financial year prior to personal contributions being made to the fund.

However, from 1 July 2022, the work test is only required to be met for personal contributions where the individual will be claiming them as a tax deduction. The work test can also be met at any time during the financial year in which the tax deduction is to be claimed. This makes things much more flexible than previously.

The work test is not required for super contributions that are made:

• prior to reaching age 67,

• for superannuation guarantee contributions,

• under an industrial award or agreement,

• for salary sacrifice contributions that are in addition to superannuation guarantee and industrial award or agreement contributions, and

• for personal non-concessional (nondeductible) contributions.

There is a maximum age limit at which personal and salary sacrifice contributions can be accepted by a superannuation fund. This threshold requires them to be made prior to 28 days in the month after the individual has reached age 75. For example, a person who turns 75 on 15 September must make personal contributions by 28 October in the financial year and their employer must make any salary sacrifice contributions to the fund by that time as well.

The total super balance

It is important to understand an individual’s total super balance (TSB) as it controls the amount of non-concessional contributions that can be made to the fund without incurring a tax penalty. Non-concessional contributions include those made by an individual for themselves or their spouse and non-concessional contributions made by anyone for a child under age 18.

A person’s TSB is calculated on 30 June at the end of a financial year and determines the amount of non-concessional contributions that can be made for the individual in the next financial year without incurring a tax penalty. As a general rule, the TSB is the individual’s balance in all superannuation funds they are a member of, including amounts in their accumulation and pension account(s). However, it can include amounts being transferred between funds on 30 June and some amounts an SMSF has in limited recourse borrowing arrangements.

How much can be contributed?

Technically, no limit applies to the amount that can be contributed to the fund. The maximum amount that can be made for a member depends on the type of contributions being made and whether the contribution will be treated as a concessional or non-concessional contribution. Tax and interest rate penalties can apply if the contributions made to the fund exceed the relevant contributions cap.

Concessional contributions

There is a standard concessional contribution cap of $27,500. However, for anyone with a TSB of no more than $500,000 it is possible to carry forward any unused concessional contributions for up to five years.

As an example, in the 2023 financial year, Fabi, who has a TSB of $300,000, wishes to claim a tax deduction of $50,000 for contributions she makes to her super fund. She looks at her myGov account, which shows she can carry forward up to $60,000 in unused concessional contributions that have not been used in the past five years. Because of the amount Fabi can carry forward, she decides to claim the tax deduction for $50,000 to offset some taxable capital gains from the sale of investments.

Non-concessional contributions

Where a person’s TSB is less than $1.7 million, it is possible to make a standard non-concessional contribution of up to $110,000 in the next financial year. However, it may be possible to access the bring-forward rule if the individual’s TSB is no more than $1.59 million.

For anyone with a TSB of between $1.48 million and $1.59 million, it is possible for non-concessional contributions of up to $220,000 to be made at any time over a fixed two-year period that commences in the year in which more than the standard nonconcessional contribution is made.

For anyone with a TSB of no more than $1.48 million, it is possible for nonconcessional contributions of up to $330,000 to be made at any time during a fixed three-year period commencing in the financial year in which more than the standard non-concessional contribution has been made.

Example 1

Rosy has a TSB on 30 June 2022 of $1.8 million. As her TSB exceeds the cap of $1.7 million, if she makes non-concessional contributions to the fund, any excess may be subject to tax and interest rate penalties.

Example 2

Amanda has a TSB on 30 June 2022 of $1.6 million. As her TSB is no more than $1.7 million, she can make non-concessional contributions of up to $110,000 if she wishes.

Example 3

Cathryn has a TSB on 30 June 2022 of $1.5 million. She can make non-concessional contributions up to the standard cap of $110,000. However, if she contributes more than the standard concessional contributions cap, she will be able to access the bring-forward rule of $220,000 over two financial years commencing on 1 July 2022.

Example 4

Jill has a TSB on 30 June 2022 of $1 million. Just like Cathryn, she can make non-concessional contributions up to the standard cap of $110,000. However, if she contributes more than the standard concessional contributions cap, she will be able to access the bring-forward rule of $330,000 over three financial years commencing on 1 July 2022. She decides to contribute $150,000 in the 2023 financial year, $100,000 in the 2024 financial year and $80,000 in the 2025 financial year.

How can contributions be made to super?

Contributions are usually made to super as a cash payment, which includes electronic transfers and cheques. However, it is possible to transfer investments and other assets to the fund that can be treated as a contribution. Some funds may not accept transfers of investments or other assets, however, this is not usually an issue where an SMSF is involved.

There are limits to the types of investments and other assets that an individual can make to super as a contribution. It is possible for an individual to transfer listed shares and other listed securities, managed fund investments, commercial property and some relatedparty investments to the fund, providing they are transferred at their market value.

Cash and electronic transfers are treated as being a contribution to the fund when they are received, so it is necessary to make sure any contributions made close to the end of the financial year are received by the fund prior to 30 June. If not, they may end up being treated as being received in the subsequent financial year and that can create some issues. Cheques are treated differently and providing the cheque is cashed as soon as possible following the receipt, it can be included in the financial year it was received by the trustee.

Transfers of investments and other assets are accepted by the fund as a contribution when the fund becomes legally entitled to them. For listed investments the transfer takes place when recognised on the exchange or when an off-market transfer is fully completed by all parties. Where real estate is involved, the transfer occurs on settlement of the property and for other investments it can be when the documents are signed to recognise the transfer to the fund.

Notifying the fund

It is important that in some circumstances the fund is notified of the type of contribution at the time it is made to the fund.

Examples of transfers where trustees should be notified before they are made into the SMSF include downsizer contributions, capital gains tax small business amounts and spouse contributions. The reason for this is to ensure they are not confused with other non-concessional contributions that are being made to the fund by the individual for themselves or for someone else.

If a person is going to claim a personal tax deduction for contributions to the fund, it is important for the SMSF to be notified prior to certain events occurring. As a general rule, the fund is required to be notified if the person intends to claim a tax deduction for the contribution prior to lodging their tax return for the year in which the contribution was made and at the latest at the end of the next financial year after the contribution was made. However, it may be necessary to notify the fund earlier than these events in question if the person is commencing a pension or rolling over their benefit to another fund. If the fund is not notified as required, the person may miss out on the tax deduction being sought.

Don’t forget if benefits are being rolled over, the fund, including an SMSF, must be registered for SuperStream.

Getting the contribution basics right

Getting these seven things right about super contributions will help you with the why, how and where of contributing to super, whether it is a big fund or an SMSF. It ensures the fund can accept the contribution, tax deductions can be claimed when necessary and there are no penalties involved in the amount contributed.