The difference between a budget announcement and law can easily cause confusion for SMSFs as to what they can and can’t do. Throw in a federal election where a change of government was anticipated and the situation is even more complex. Tim Miller highlights the rules advisers and their clients need to know when it comes to SMSF contributions.
I recently did a presentation to a group of SMSF professionals and trustees outlining all of the rules about making and accepting contributions. A part of the presentation included the issues associated with making non-concessional contributions. A trustee approached me after the presentation to inquire about when the $500,000 lifetime non-concessional contribution limit was removed.
My answer was, of course, that it never made it further than being a budget announcement. It was a significant budget announcement that was set to take effect from budget night 2016 and until the announcement was made to scrap it, people took it as law and didn’t contribute. In the instance of this trustee, they took it even further and never contributed again.
It alerted me to the realities that so much is announced, proposed, drafted and even introduced into parliament that it’s no wonder some people get confused with what the rules are and ultimately this leads to genuine mistakes and missed opportunities.
The 2019 federal election was one of those inconveniently timed events that intertwined superannuation election promises with 2019 budget announcements and the continuation of previously announced superannuation reform measures. As a result, people were confronted with the potential of caps going down, the age to contribute going up, work requirements becoming unclear and practical ease being replaced with administrative uncertainty.
With 30 June 2019 now behind us, let’s undo the contribution confusion and work out what we can do now and what is still just an announcement, and while we are at it, let’s identify what options are available if someone does the wrong thing.
Non-concessional contribution cap
This matter is relatively straightforward, but from 1 July 2019 the non-concessional contributions cap remains at $100,000, or more accurately, the concessional contributions cap remains at $25,000 and the non-concessional cap remains at four times the concessional cap. The federal opposition announced on a number of occasions it intended to reduce the cap to $75,000, but people can take comfort that, for the foreseeable future, there is no change.
By virtue of no change to the concessional contributions cap, the three-year bring-forward amount also remains at $300,000. As a friendly reminder, an individual’s capacity to make non-concessional contributions is subject to the contribution standards within the Superannuation Industry (Supervision) (SIS) Regulations and upon satisfying those standards, is subject to the member’s total superannuation balance at the preceding 30 June as follows:
- if less than $1.4 million – bring forward $200,000, maximum contribution = $300,000,
- if between $1.4 million and $1.5 million – bring forward $100,000, maximum contribution = $200,000, and
- if between $1.5 million and $1.6 million – bring forward $0, maximum contribution = $100,000.
Now the 2020 financial year has commenced, the concept of the transitional bring-forward cap can be put to bed with the $300,000 being the only number to measure against.
Work test exemption from 1 July 2019
While unlikely to be a big-ticket item for many SMSF members, the introduction of the 12-month work test exemption is likely to cause confusion and result in mistakes being made, however, it could also prove to be extremely valuable for some. It is important to distinguish this ‘in force’ measure from the government’s announcement to increase the contribution cut-out age from 65 to 67 (more on this below).
From 1 July 2019, an individual who is 65 or over and no longer working can make superannuation contributions subject to satisfying two conditions.
The first condition is the individual must have satisfied the work test in the financial year immediately prior to the year of the contribution and the second requirement is the individual’s total superannuation balance at 30 June immediately prior to making the contribution is less than $300,000.
To satisfy the work test in the previous financial year, the individual must have been gainfully employed for at least 40 hours in 30 consecutive days.
Who does this measure affect?
This measure is going to have the capacity to impact on three distinct groups of people, all, of course, subject to them having less than $300,000 in superannuation at the previous 30 June.
The first group is those individuals who turn 65 during the financial year. Historically, the emphasis on this group was they had to make sure they worked during the year of their 65th birthday in order to make a contribution or they had to make the contribution prior to their 65th birthday. Now, so long as they worked the previous year, the timing of the contribution is not so critical. The added bonus is if they turn 65 after 1 July, they are entitled to the full $300,000 and, given their total superannuation balance is less than $300,000, are not at risk of failing the bring-forward criteria.
The thing about budget announcements is they have very little meaning without context and what we don’t have is context.
The second group is those who triggered the bring forward in the previous year, but did not contribute to the maximum capacity. While this group may exist, it is unlikely that someone who contributes more than $100,000 in a prior year will have less than $300,000. However, it isn’t unrealistic to apply this to individuals who haven’t contributed significantly to super through their employment life cycle and have come into surplus funds as they approach retirement. In any case, this group has the capacity to maximise any triggered bring-forward amount.
The final group is those who have worked past 65 and no longer avail themselves of the bring-forward provisions. For them this measure provides the capacity to contribute a further $100,000 to superannuation as a non-concessional contribution.
Importantly, this work test exemption does not limit itself to non-concessional contributions. If an individual has passive income in the 12 months following retirement, then the concessional contribution cap is available.
The bigger impact item for this measure may be the use of the small business capital gains tax contribution. It is conceivable an individual has had limited capacity to contribute to super due to putting all their resources into their business. Timing and capacity to make these contributions is linked not only to the sale of an active asset, but also satisfying the work test, so this 12-month extension could prove valuable.
Increasing the contribution age – only an announcement
In the 2019 federal budget, the government announced it is going to increase the contribution age to 67 from 1 July 2020.
What this means in practice is that anyone who has not attained the age of 67, regardless of work status, will be entitled to the same contribution rules that currently apply to anyone who hasn’t attained the age of 65.
This measure will shift the bring-forward rules up by two years, giving greater capacity for 65 and 66 year-old individuals to make larger contributions and it will be operated the same way that the existing rules work, that is, the non-concessional contribution cap will be linked to the total superannuation balance of $1.6 million.
The thing about budget announcements is they have very little meaning without context and what we don’t have is context. For instance, is this measure the silver lining to the possibility of increasing the retirement age? There is no indication it is, however, a closer look at the announcement does reveal direct links to the age pension age being increased to 67.
Also, what impact will this measure have on other measures such as the downsizer contribution? Again, there is nothing to suggest it will have any impact, but it is not inconceivable an uplift in the contribution age also means an uplift in the eligibility to make downsizer contributions.
This is why it is always important to have context and then be ready to educate.
The announcement of this measure and the enactment of the work test exemption within a relatively small time frame is likely to create confusion and lead to mistakes being made. Therefore, it is important we educate all trustees and SMSF professionals that deal directly with trustees to make sure they do the right thing. In this instance, the message to be understood is that anyone over 65 can only contribute if they are still working or they ceased gainful employment in the previous year and have less than $300,000.
Doing the wrong thing
People make mistakes and mistakes can be fixed. Superannuation contributions are subject to two distinct sets of rules. Contributions that exceed the contribution cap are subject to excess contribution rules and contributions that are not entitled to be made are subject to refunding rules.
Importantly, only those contributions that are not able to be received in the first instance are able to be directly returned to the contributor, primarily because they should not be recognised as contributions. However, contributions that result in an excess contribution cannot be returned directly to the contributor. Instead, they must be washed through the ATO under the appropriate release authority. The onus of proof as to whether a contribution made prior to turning 65 is a mistake will fall to the trustees and as such it is a risky proposition to refund a mistaken contribution prior to age 65 without having substantial proof the amount was not a contribution in the first instance.
it is important we educate all trustees and SMSF professionals that deal directly with trustees to make sure they do the right thing.
These two distinct sets of rules are where these new measures can be beneficial but also complex for trustees.
We have all come across individuals who make a contribution after age 65 not having satisfied the work test. In very simple terms, the trustee cannot accept this contribution. The amount must be returned within 30 days of becoming aware of the contribution. The non-release of this amount within 30 days is a direct violation of the SIS Regulations. We can all argue about when the 30 days commences, but the ATO’s historic position is that for SMSF trustees the 30 days starts from the day of the contribution because of the direct link between member and trustee.
What this means is that for SMSFs with members over the age of 65 who make a contribution and do not satisfy the work test, or the work test exemption or downsizer contribution conditions, then the fund can’t accept the contribution. As a result, any amount put in needs to be taken out.
There are also a couple of key matters to be taken into consideration post-budget and election.
Firstly, there is no change to the catch-up concessional contributions and 2019/20 is the first year an individual can use any unused concessional contribution from last year, subject to the total superannuation balance being less than $500,000.
Secondly, the increase in the age for spouse contributions is currently just an announcement. This measure is not law and if it becomes law, it will not take effect until 1 July 2020.