Newsletter No. 5, May 2012

Contributions’ Caps

Now that we are in the month of May, it is time to double-check the contributions received by your Self Managed Superannuation Fund (SMSF) to ensure that you have not exceeded your contributions cap.

In Chapter 21 of The Self Managed Super Handbook I have outline what types of contributions can be received by your SMSF and when they can be received by your SMSF. Then in Chapters 21a and 21b I have shown the concessional and non-concessional contributions caps.  I also explained how you could end up paying 93% tax on your contributions if you exceed both caps.

Based on my discussions with trustees, it appears that some trustees are not sure which category their contribution falls under.  It is for this reason that I thought I would start off by explaining how to decide which category your contribution belongs to.

Non-Concessional Contributions

If you are an employee and decide to contribute money into your SMSF from your salary/wages which have already paid tax (i.e. post tax contribution), then your contribution is a “non-concessional contribution”. It is “non-concessional” because you would not get any tax concession in the SMSF.  This means, the money would not attract the concessional tax rate of 15% in the SMSF.  This is because you have already paid tax on the contribution when you received it as salary/wages.  It is not taxed again when it is received by your SMSF.

Also, if you make personal contribution from money received from elsewhere (this excludes personal injury payments, or proceeds from the disposal of certain assets that qualify under small business retirement exemptions) into your SMSF and did not claim any tax deduction on your contribution, then your contribution is a “non-concessional contribution”.  Again, no tax is payable by the SMSF.

If your spouse makes a contribution for you into your SMSF, then the contribution is also a “non-concessional contribution”.  Again, no tax is payable by the SMSF.

If you exceed your concessional contribution cap, then the amount in excess of the concessional contribution cap is also treated as a “non-concessional contribution”.

Concessional Contributions

If you have entered into a salary sacrifice arrangement with your employer, and instructed your employer to contribute your before tax salary/wages into your SMSF, then your contribution is a “concessional contribution”.  This is because it will attract the concessional tax rate of 15% when received by your SMSF.  This is because you have not paid tax on your contribution when you received it as salary/wages and instead of you paying tax at your marginal tax rate your SMSF now needs to pay tax at the concessional tax rate of 15%.

Also, if you are an employee, your employer will need to provide superannuation support (i.e. Superannuation Guarantee (SG)) for you.  The prescribed level of SG that your employer is required to pay into a superannuation fund is currently 9% of your salary.  This amount, when received by your SMSF, attracts 15% tax and is treated as a “concessional contribution”.  If your employer decides to pay more than 9%, then the amount above the 9% will also be treated as “concessional contribution” and subject to the 15% tax.

Basically, if the SMSF has to pay a 15% concessional tax on a contribution, then the contribution is classified as a “concessional contribution”. If the SMSF does not pay any tax on the contribution, then it is classified as a “non-concessional contribution”.

Non-Concessional Contribution changed into Concessional Contribution

Your non-concessional contribution can change into a concessional contribution if you have claimed a tax deduction. People who are eligible to claim a tax deduction on their contribution are:

  • fully self employed people who did not work under a contract principally for labour;
  • partly self employed people who at one time or another throughout the financial year worked as an employee and their employer did not provide any superannuation support for them or were required to provide superannuation support for them;
  • partly self employed people who received assessable income, plus reportable fringe benefits, plus reportable employer superannuation contributions that is less than 10% of their total assessable income and total reportable fringe benefits amount; or
  • people who are not entitled to, and did not receive, any employer superannuation support for the financial year of income.

If you meet any of the above criteria, then you can make personal contributions into your SMSF and claim a tax deduction on your contributions.  However, you can only claim the deduction once you have notified your SMSF of your intention to claim the deduction and your SMSF has provided you with an acknowledgement to claim the deduction.

The category of your contribution would then change from “non-concessional contribution” to a “concessional contribution”.  This is because, by claiming the tax deduction on your contribution in your personal income tax return, your SMSF will pay the concessional 15 % tax when its lodges the SMSF’s annual tax return.

If you make an in-specie contribution (such as with shares or property), the same rule applies.  This means that you first need to account for any capital gains tax payable on the transfer of the asset from you to your SMSF.  Once the tax is paid the in-specie contribution received by your SMSF will be classified as either “non-concessional” or “concessional” depending on whether you have claimed a tax deduction or not.  Please remember that you can only claim a tax deduction if you are eligible.

Now that you are clear on what your contribution is classified as, you now need to check that your SMSF has not received more than the contributions cap amount.

There is no limit on how much of each category you can contribute into your SMSF.  The caps are there to determine how much tax you will need to pay on the contribution once it exceeds the cap.  Therefore, if you want to contribute more than the cap, you can.  It just means you will have to pay a higher tax rate on the contribution that exceeded the cap amount.

“Concessional Contributions Cap” and “Non-Concessional Contributions Cap”

For the current financial year (i.e. from 1 July 2011 to 30 June 2012), the concessional contributions cap for people under the age of 50 is $25,000.  If a person is aged 50 or over, the concessional contributions cap is $50,000.

For the current financial year, the non-concessional contributions cap is $150,000.  However, if you are under the age of 65 at the start of a financial year, you can bring forward two years worth of non-concessional contributions.  So, in one financial year, you can contribute up to $450,000 then, you do not contribute any more contributions for another two financial years.  This three year period starts with the year that you first contribute more than the $150,000 non-concessional contribution.  Past contributions need to be monitored carefully if you are using the “bring forward” rule, as it’s very important not to contribute more than $450,000 in any three year period.

There has been a lot of confusion on the caps amount because of the changes since the caps were introduced from 1 July 2007.  I have summarised below the caps amounts since 1 July 2007:

Concessional contributions cap

Financial Year

Member aged under 50

Member aged 50 or over

1/7/2007 –   30/6/2008

$50,000

$100,000

1/7/2008 –   30/6/2009

$50,000

$100,000

1/7/2009 –   30/6/2010

$25,000

$50,000

1/7/2010 –   30/6/2011

$25,000

$50,000

1/7/2011 –   30/6/2012

$25,000

$50,000

Non-concessional contributions cap

Financial Year

Cap amount

1/7/2007 –   30/6/2008

$150,000

1/7/2008 –   30/6/2009

$150,000

1/7/2009 –   30/6/2010

$150,000

1/7/2010 –   30/6/2011

$150,000

1/7/2011 –   30/6/2012

$150,000

Under 65

Bring forward (3   years period) $450,000

As I stated earlier, there is nothing stopping you from contributing more than the caps amounts.  However, once you have exceeded the caps, the tax payable on your contributions would be higher as detailed below:

Cap

Tax rate

Contributions in excess of the concessional contributions cap

31.5% in addition to the 15% paid by the SMSF

Contributions in excess of the non-concessional contributions cap

46.5%

Excess contributions tax statistics

As you can see below, the number of people that have exceeded the contributions caps is alarming.  The figures below were published by the Australian Taxation Office (ATO) as at 13 December 2011:

Type of assessment

2008 financial year

2009 financial year

2010 financial year

Excess concessional contributions only

18,068 people

15,315 people

45,330 people

Excess non-concessional contributions only

1,736 people

1,550 people

6 people

Both excess concessional and non-concessional contributions

406 people

393 people

14 people

In The Self Managed Super Handbook, I stated that if you have exceeded the contributions caps, you can apply to the ATO for the Commissioner to exercise his discretion to disregard or reallocate the excess contributions.

However, you can see from the table below as well as the Tribunal cases I have mentioned below that the number of applications where the Commissioner has exercise his discretion is very low:

 

2008 financial year

2009 financial year

2010 financial year

2011 financial year

Application received

1,270

1,017

1,934

103

In progress

12

28

80

11

No discretion exercised

898

812

1,354

66

Discretion exercised

360

177

500

26

Tribunal Cases

There have been quite a number of cases appearing in the Administrative Appeals Tribunal earlier this year in relation to members of SMSFs exceeding their contributions cap.

If you are interested in reading the full detail of the cases, please visit www.austlii.edu.au and search under the following cases:

(1)   Naude and Commissioner of Taxation [2012] AATA 130 (28 February 2012)

(2)   Leckie and Commissioner of Taxation [2012] AATA 129 (28 February 2012)

(3)   Tran and Commissioner of Taxation [2012] AATA 123 (28 February 2012)

(4)   Peaker and Commissioner of Taxation [2012] AATA 140 (6 March 2012)

(5)   Chantrell and Commissioner of Taxation [2012] AATA 179 (23 March 2012)

The first three cases above were all in relation to members of SMSFs entering into salary sacrifice arrangements with their employers.  They all had arrangements where their employers would pay contributions into their SMSF from salary/wages accrued in the previous month.  For example, wages accrued for the month of June were paid as a salary sacrifice superannuation contribution into their SMSF in the month of July.  The problem created here was that because the member did not check their contribution limit, it caused them to exceed the limit in the following financial year.  They all asked the Commissioner to exercise his discretion to allow them to reallocate the excess contribution to the previous financial year.  The Commissioner chose not to use his discretion and the excess contributions were not allowed to be reallocated.  The Tribunal Member agreed with the Commissioner’s decision on all of the above cases.  As a result, they all ended up having to pay excess contribution tax.

The fourth case above is one where a member of a SMSF read a media article and thought she could contribute $450,000 into her SMSF in one financial year.  She complained to the Commissioner that the media article failed to inform her that she needed to be under the age of 65.  As she was over the age of 65, her non-concessional contribution limit was only $150,000.  Again the Tribunal Member agreed with the Commissioner’s decision not to allow the excess contribution to be reallocated to another financial year.  As a result she ended up with a large excess contribution tax bill.

The fifth case above is where a member of a SMSF transferred $60,000 of a concessional contribution on behalf of himself ($40,000) and his wife ($20,000) via an electronic funds transfer on Saturday 30 June 2007 without realising that his bank processes such transfers only on business days (i.e. Monday to Friday).  As a result, the contribution was not credited to his SMSF’s bank account until the following Monday 2 July 2007.  The ATO assessed the concessional contribution as being made in the 2008 financial year instead of 2007 financial year.  The member ended up exceeding his concessional contribution cap in the 2008 financial year.  This meant he ended up with an excess contribution tax liability of about $17,000.

The member requested the Commissioner to reallocate the excess amount to the previous (2007) financial year.  He argued that it was reasonable for him to have expected the transfer of money would have been instantaneous.  He contended the transaction had been recognised by the bank as having been effected on 30 June 2007, and further argued that had the transfer been on a business day, it would have been effective virtually instantaneously.  The Tribunal Member stated that the member appeared to have acted in good faith, however as the money was not credited to the SMSF account until 2 July 2007, no special circumstances existed and therefore the Commissioner’s decision not to allow the reallocation of the contribution was upheld.

Please be careful this year as 30 June 2012 is a Saturday. 

If you are thinking of making last minute contributions into your SMSF, please check to make sure you have not exceeded the contributions cap, and if not, please make sure your contribution is received in your SMSF’s bank account on or before Friday 29 June 2012 if you intend for your contributions to be counted for the current financial year.

Also, please remember that your salary sacrifice superannuation contributions and your employer 9% Superannuation Guarantee contributions are all treated as concessional contributions.  They are all counted towards the one limit (i.e. $25,000).  Therefore, you need to check how much your employer has already paid into your SMSF in order to work out how much more you can contribute without exceeding the concessional contributions cap.  Some employers will make contributions in the same month the salary/wages is earned, whereas, others will make contributions into your SMSF the month after you earned your salary/wages.  You could end up exceeding your contributions caps due to the timing differences.

Please remember that the contribution is calculated according to when the money is received in your SMSF and not when you become entitled to it.

Please also remember that once you have exceeded your concessional contributions cap, the excess amount is than treated as non-concessional contribution and counts towards the non-concessional contributions cap.

I have also included below useful links to various documents on the ATO website that will assist in your understanding of this month’s topic.

1. Deduction for personal super contributions

You will find in this linked document, the eligibility criteria on when a person is entitled to claim a deduction on their personal superannuation contribution.    The link also provides a form that you must use (NAT 71121) to claim the deduction as well as explaining that the form must be provided to your SMSF prior to you lodging your income tax return or by the end of the financial year (whichever occurs first).  It also explains that your SMSF must give you an acknowledgement in order for you to claim the deduction.

2. ATOID 2007/225  Acceptance of fund capped contributions by a SMSF.

This document explains that a trustee of a SMSF is not required to return any part of the contribution that exceeded the contribution cap if the contributions are made in various stages in a financial year.

3. ATOID 2008/90  Return of fund capped contributions by SMSF.

This document explains that a trustee of a SMSF must return the part of the member’s contribution that exceeded their non-concessional contribution cap when a one-off contribution is made in a financial year.

4. ATOID 2009/29    Return of contribution after 30 day time limit.

This document explains that a trustee of a SMSF is required to return the amount of a contribution that has been accepted as being inconsistent with the contribution standards, even if more than 30 days has expired since the trustee became aware of the inconsistency.

5. ATOID 2010/104  Restitution of a “mistaken” contribution.

This document explains that even if you have mistakenly contributed more than the cap amount and the amount in excess was subsequently returned to you, it will still count towards the contributions cap.

6. ATOID 2012/16   Excess contributions tax:  concessional contributions – allocation of contributions

This document explains that when a contribution has been received in one financial year and allocated in accordance with the superannuation regulations to the member in a subsequent financial year, then it is counted as a concessional contribution in the financial year of allocation rather than the year of receipt.

7. TA 2008/12   Non-cash contributions to superannuation funds.

This document reminds trustees of SMSFs that when assets other than cash are transferred to a SMSF, they must take any steps necessary to ensure the SMSF’s ownership of the assets is recognised.  The document also reminds trustees that the arrangement involves a contribution to the SMSF that must be allocated to a member and reported for the purposes of the excess contributions taxes.

8. TR 2010/1   Superannuation contributions.

This Tax Ruling explains how a contribution can be made and when a contribution is considered to be made.  Paragraphs 183 to 186 of the ruling give an example of an electronic funds transfer.

9. PS LA 2008/1 Commissioner’s discretion to disregard or reallocate concessional and non-concessional contributions.

This Practice Statement gives examples of when the Commissioner is likely to exercise his discretion to disregard or reallocate concessional and non-concessional contributions to another financial year.  It discusses “special circumstances” that must exist in order for the discretion to be made.  Special circumstances are unusual circumstances, or circumstances out of the ordinary.  Whether circumstances are special will vary from case to case, but they must exist to make it unjust, unreasonable or inappropriate to impose the liability for excess contributions tax.

10. PS LA 2011/24  Remission of admin penalties for non compliance with release authority.

This Practice Statement explains that if a member of a SMSF is liable for excess concessional contributions tax, they can choose to pay the liability from their personal resources or may withdraw money from their SMSF by giving a “Voluntary release authority” to the SMSF within 90 days after the date of the release authority.  On the other hand, if a member of a SMSF is liable for excess non-concessional contributions tax, they must withdraw an amount equal to the liability from their SMSF by giving the “Compulsory release authority” to their SMSF within 21 days after the date of the release authority.  If the member does not do this within 21 days, they may be liable for an administrative penalty of 20 penalty units (i.e. $110 x 20 = $2,200).  The Practice Statement provides guidelines for the remission of administrative penalties.

Monica Rule is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Fund”.  Her advice is general in nature and readers should seek their own professional advice before making any financial decisions.

Monica Rule