Superannuation contribution limits
Superannuation strategies for SMSF trustees.
There are limits placed on all types of superannuation contributions. These can be annual limits, as is the case for concessional contributions, three year limits, as they are for non-concessional contributions, and lifetime limits as apply to the small business CGT exemptions. Where the limits are exceeded penalties are payable.
All limits are applied on an individual basis. As every super fund must have the tax file number for each of its members the ATO can easily make sure the limits are not breached.
The annual and the three year limits are designed to increase over time as a result of changes in Average Weekly Ordinary Times Earnings (AWOTE). Under the old superannuation system the contribution limits changed annually also by increases in AWOTE.
Under the old superannuation system, the one that applies until June 30, 2017, the limits changed by in line with the percentage increase in AWOTE in amounts of $5,000. This means that instead of the contribution limits increasing each year, as they did under the old system, the limit only increased once the cumulative increase reached $5,000. This can result in the limits staying the same for up to 2 or more years.
There was a freeze on increases in the concessional contribution limits until July 1, 2014. This meant the contribution threshold was frozen at $25,000 until July 1, 2014. For the 2015, 2016, and 2017 years the concessional contribution limit increased to $30,000.
As a result of the super reform package passed in late 2016 the concessional contribution limit will decrease to $25,000 for the 2018 year. In addition, the fixed dollar increments in this contribution limit have been decreased from $5000 to $2500. The rate of increase is still based on percentage increases in AWOTE, but as a result of the decreased $2500 fixed amount the limit will hopefully increase more often.
The maximum concessional contribution limit applies on an individual basis, instead of an employer basis. This means that the maximum anyone can have in concessional super contributions a year, if they are under 60, was $30,000 for the 2016 and 2017 years. As a result of the recent super amendments this limit will decrease to $25,000 for the 2018 financial year.
Where a member of a super fund was 49 or older at July 1, 2015 they have a concessional contribution threshold of $35,000 for the 2016 and 2017 years. This limit has been scrapped from July 1, 2016, and there will now only be the $25,000 limit.
As compensation for the removal of the higher limit for those aged over 49 a new system will be introduced from July 1, 2019. Under this system an individual can carry forward unused amounts of the concessional limit over a five-year period as long as their total superannuation balance is less than $500,000. The five year period can be accessed on a rolling basis.
Trustees of an SMSF must therefore ensure that the amount they receive from employers or members as concessional contributions in a year don't exceed the applicable limits.
An example of how this works is Bruce who is 49 on July 1, 2017 and works for two different companies. His main employer is Wayne Enterprises and he works part time for a security company.
His main employer contributes $20,000 a year as deductible employer concessional contributions while his part time employer contributes $5,000 a year. If Bruce decided to salary sacrifice $20,000 of his salary from Wayne Enterprises for the 2015 financial year his total annual concessional contributions would be $45,000 and thus $10,000 over the limit for the 2017 year and $20,000 over the limit for the 2018 year.
Self-employed/personal concessional contributions
In addition to tax deductible concessional contributions made by employers, trustees of an SMSF are also likely to receive concessional self-employed super contributions. There are strict guidelines as to who qualifies for making self-employed contributions up until June 30, 2017. After July 1, 2017 these tax-deductible contributions will be called personal super contributions and many of the current restrictions will be removed.
Currently a person must pass one of two tests before a contribution can be regarded as a concessional self-employed contribution. Under the first test a person cannot receive, or be entitled to receive, any superannuation support from an employer over a financial year. This is a particularly nasty test. Even if someone did not receive super support from an employer, but the employer is held to be liable for SGC contributions at some later date, that person will not qualify as self-employed.
The second test is more forgiving as this will allow a person to qualify as self-employed if they only received minor employer superannuation support during a financial year. Minor support is defined not by how much is contributed, but by how much a person earns in employment income in a year. To pass this test employment income must be less than 10 per cent of a person's total assessable income.
Employment income not only includes salary and wages, but also exempt income, reportable fringe benefits and reportable employer super contributions, which are salary sacrifice contributions. Assessable income is the total of a person's employment income, business income, investment income, partnership and trust income, foreign income, and net capital gains.
In addition to passing these tests a tax deduction is only allowed to people who are under 75 and have notified their superannuation fund in writing of their intention to claim a tax deduction for the contribution.
From July 1, 2017 there will be no employment income tests for someone to make a tax-deductible personal concessional super contribution. The only requirements will be that they are under 65, or if aged 65 up to 74 they pass the work test, and that they notify in writing their super fund of their intention to claim tax deduction for the contribution.
Trustees of an SMSF must also make sure that the relevant notice required under the act, which must be lodged by the person making the tax-deductible super contribution, is completed and retained as a part of the fund's records.
This notice of intent to claim must be provided to the SMSF before the member has lodged their income tax return for the year the claim is made and before the end of the following financial year the contribution was made.
There can be a risk, when a lump sum amount is withdrawn from the fund before the contribution is classified as tax-deductible, of the amount withdrawn being apportioned between tax-deductible concessional contributions and after tax non-concessional contributions.
The risk of having some of a super contribution not classed as a tax-deductible self-employed contribution can be avoided. This is achieved by lodging an ATO form at the time of making a tax-deductible contribution to a super fund. The form is called a “deduction for personal super contributions” form and it can be downloaded from the ATO website.
There are two types of limits that apply to non-concessional contributions. The first is an annual limit and the second is a “bring forward” or a three year limit.
The maximum annual amount that can be contributed as a non-concessional superannuation contribution is currently six times the annual concessional limit. This means for 2014 it was $150,000, and for the 2015, 2016 and 2017 years it was $180,000. With the other superannuation changes being introduced from July 1, 2017 there are also changes being made to the maximum limits on non-concessional contributions.
The changes result in a two tiered test that reduces the multiple of the concessional contribution limit, and a limit placed on people making non-concessional super contributions depending on the value of all of their superannuation accounts.
Under the first tier of the new system the non-concessional contribution limit will only be $100,000, being four times the concessional contribution limit that will apply from July 1, 2017. The ability to bring forward two years of non-concessional contributions will be retained under the new system.
The second tier of the new system imposes a new limit at which point no further non-concessional contributions can be made. When the value of a person's superannuation is greater than the new $1.6 million pension transfer limit, no further non-concessional contributions can be made.
For example if a member's balance was under $1.59 million at June 30, 2017 they can make a maximum non-concessional contribution of $100,000 after July 1, 2017. If that member's balance was $1.65 million at June 30, 2017, they could not make a non-concessional contribution after July 2017.
Superannuation funds will not have to calculate whether a non-concessional contribution will result in the $1.6 million limit being exceeded continually through a year, instead the $1.6 million limit will apply to what a member's superannuation balance was at June 30 of the previous year.
As the annual concessional contribution limit increases, so will the annual non-concessional limit increase. People under 65 can make contributions up to this annual limit, but for those aged from 65 to 74 they must satisfy the work test.
Under this method, a person can bring forward up to two years of the annual limit. Under the current annual limit a person can contribute up to $540,000 in non-concessional contributions in a year, as long they have not exceeded the non-concessional contribution limits previously and do not make non-concessional contributions in the next 2 years. From July 1, 2017, the maximum non-concessional contribution that can be made using the bring forward rule will be $300,000.
The three year limit only applies to people under the age of 65. Someone who turns 65 during a financial year can use the bring forward rule, if they are eligible, before they turn 65. If they make the contribution after they turn 65, but before the end of the financial year, they must have met the work test in that year.
The new non-concessional system
The current non-concessional contribution limits apply up to June 30, 2017, except when the two-year bring forward rule has been activated. The non-concessional contribution limit that applies until June 30, 2017 is still $180,000 plus the ability to bring forward two years at the current limit.
The maximum non-concessional contribution that can be made after July 1, 2017 will be $300,000 using the bring forward rule. If the non-concessional contribution will result in a superannuation balance of more than $1.6 million, the contribution is limited as follows:
Less than $1.4 million
Between $1.4 to $1.5 million
Between $1.5 to $1.6 million
Under the current system if the $180,000 limit has not been exceeded in the previous three years a person can contribute up to $540,000 if they have not turned 66. When a person turns 65 during a financial year, and they can use the bring forward rule, they can contribute up to $540,000 before their 65th birthday without any further tests being passed.
Where someone has turned 65 during a financial year, and make a non-concessional contribution after having turned 65, they must pass the work test for the financial year they are making the non-concessional contribution. Once someone is 66 or older they are unable to use the bring forward rule and are limited to the annual non-concessional contribution limit.
The important thing to understand is that the new non-concessional contribution limits will apply from July 1, 2017, and will only affect superannuation fund members that activate the two-year bring forward rule during the 2017 financial year but do not contribute the full amount.
If the non-concessional contribution, using the bring forward rule, is made before July 1, 2017 the new limits will not apply. If however the bring forward rule has been activated before July 1, 2017, and the full amount not contributed, the new limits will apply.
Transitional arrangements will apply based on when the non-concessional contribution is made that triggers the bring forward rule as follows:
If someone contributed $190,000 during the 2016 financial year, and nothing in the 2017 year, they will be limited to a maximum non-concessional contribution of $460,000. This is made up of two $180,000 maximum contributions and one at $100,000.
If the bring forward rule is activated by a contribution of $190,000 during the 2017 financial year, the maximum non-concessional contribution will be limited to $380,000. This limit is made up of the $180,000 limit applying for the 2017 financial year and two years of the new $100,000 limit.
If the maximum contribution has not been made by July 1, 2017 the $1.6 million limit will also apply to how much can be contributed. This would appear to mean that someone who had triggered the bring forward rule in the 2016 financial year by making a non-concessional contribution of $190,000, that has a superannuation balance at June 30, 2017 of $1.65 million and did not make a non-concessional contribution during the 2017 financial year, could not make any further non-concessional contributions after July 1, 2017.
Non-concessional contributions not included in the limits
Two types of non-concessional contributions are not covered by the limits. These are amounts contributed under the small business Capital Gains Tax (CGT) exemptions and contributions resulting from personal injury payments.
Contributions resulting from personal injury claims have no limits at all, but the small business CGT exemption contributions have a lifetime limit. For the 2013 year the limit was $1,255,000 and for the 2014 financial year the limit is $1,315,000. This limit also increases in line with increases in AWOTE in $5,000 increments.
There are no limits placed on amounts that can be rolled over.
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