Tax with Max: Making a self-employed super contribution

Passing the super contribution tests, saving an inheritance, leaving property to a non-dependant and more.

Summary: To make a tax-deductible self-employed superannuation contribution, a person must pass three tests. They must not receive any employer compulsory super contributions. They can make the contribution if their salaries and wages income makes up less than 10% of their total taxable income. And they must be eligible to make a contribution.

Key take-out: Someone who is aged over 65 and not working may wish to consider looking for some paid employment to pass the 40 hour work test and thus qualify to make a self-employed super contribution, which could save a substantial amount of income tax.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Making a self-employed super contribution

I am 62 and my wife is 66 and looking to sell an investment property. Neither of us works and our only income, apart from an SMSF pension, is some rental income and dividends well under the income tax threshold. If we sold the rental property a profit of around $300,000 would be made. As we own the property 50/50, there will be a taxable capital gain of $75,000 each after the discount. As I am under 65 can I make a deductible contribution to super and thus reduce the tax payable? My wife does not meet the work test so I assume there are no reductions available to her.

Answer: There are three tests that a person must pass before they can make a tax-deductible self-employed superannuation contribution. From what you have described, you would qualify for making a self-employed super contribution of up to $35,000, which is the current limit for someone who is 50 or over.

Under the first test a person must not receive, or be eligible to receive, any employer compulsory superannuation contributions. Just because someone has not received the benefit of an employer super contribution does not mean that they would pass this test.

There are many people who, rather than being employed, work as contractors. If the ATO can show that a person is not really a contractor, and therefore does not pass the business tests, they will be classed as an employee of the business that they have been working for.

This will mean that the business that has paid the contractor must make SGC superannuation contributions and also cover them for workers compensation insurance. In addition if the contractor made a self-employed super contribution it will be disallowed as a tax deduction.

Under the second test a person can still make a self-employed tax-deductible super contribution if their salaries and wages income makes up less than 10% of their total taxable income. This would mean that someone in your wife’s situation, based on a capital gain of $75,000, could receive employment or contracting income of up to $7500 and still qualify for a self-employed tax-deductible super contribution.

The third test requires a person to be eligible to make a contribution. From what you have described, someone in your wife’s situation, aged over 65 and not working, would not pass this third test. It may be worthwhile your wife looking for paid employment so that she can pass the 40 hour work test. She would more than likely pass the second test that allows a person to make a self-employed tax-deductible super contribution as her employment income would be less than 10 per cent of her taxable income.

The work does not have to be high-paying but a market rate for the work undertaken should be received. The work could be distributing advertising leaflets. To put things into perspective if your wife qualified for the self-employed super contribution she would save income tax of $6825. This is the difference between income tax of 34.5% on the $35,000 of self-employed super contribution and the 15% contributions tax.

Satisfying the work test rule

My wife and I are both over 70 and drawing pensions from our SMSF. My wife recently received an inheritance of $159,000, which we would like to deposit into our SMSF. I recently undertook more than a week’s paid work on a project in Papua New Guinea. Will this satisfy the “work test rule” and if so how much can be contributed to the SMSF?

Answer: As long as the work undertaken in Papua New Guinea was paid work, and not done as a volunteer, that should mean someone in this situation will pass the test of working 40 hours in a continuous 30-day period in the financial year when the contribution is made. The annual non-concessional contribution limit for someone who was 65 or older for the 2015 year is $180,000.

More on the Commonwealth Seniors Health Card

I’m still confused about the Commonwealth Seniors Health Card. I turned 65 in September 2014. Under the current rules I would qualify for the card. As from January 2015 the rules change and I don’t qualify in any shape or form. If I apply now, before December 31, would that mean I would still qualify to hold the card next year under the current rules?

Those who apply and receive the CSHC before January 1, 2015 will have their entitlement to the card assessed under the current rules as the grandfathering provisions will apply. You should not waste any time in applying for the CSHC as I am not sure what your position will be if your application is held up and you do not have it assessed until after December 31, 2014.

Saving an inheritance

I am 71 years old and my wife is 62. We have an SMSF and withdraw what we need, which is more than the minimum pension payment. I have an age pension and my wife a disability pension of roughly $400 per fortnight each. If we receive an inheritance of approximately $400,000 to $500,000 can we still put some of that inheritance in super? I take it that would be the smart thing to do if we can.

Answer: Someone who received an inheritance would not be able to contribute this to superannuation unless they met the 40 hour work test. If they did pass the work test they could only contribute up to $180,000.

However, your wife is under 65. Those aged under 65 can make a $500,000 non-concessional contribution. They will be eligible for up to $540,000 under the three-year bring forward rule if they have not exceeded the annual non-concessional contribution limit in the three previous years. For the 2015 year the limit is $180,000 and for prior years it was $150,000.

Leaving a property to a non-dependant

Could you tell me how an investment property in an SMSF is treated for tax purposes when it is left to an adult non-dependant daughter? Is it different to inheriting normal super “cash”?

Answer: The tax treatment of a superannuation benefit that passes to an adult non-dependant is not based on the underlying asset held by the super fund, but it is based on what type of superannuation benefit is paid out.

The two types of superannuation benefits are taxable: those that result from concessional tax deductible superannuation contributions made by employers and the self-employed, and tax-free superannuation. Tax-free superannuation benefits result from non-concessional contributions and small business capital gains tax retirement concession contributions.

The process of winding up and paying out a superannuation fund starts with calculating what the total value of the superannuation benefits are at the time of death of the member. The breakup between taxable and tax-free superannuation benefits will depend on whether the member was in pension phase or accumulation phase. The investments in the super fund can either be converted to cash and paid out, or paid as an in specie distribution by transferring ownership of an asset.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au

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