Tax with Max: Making self-employed super contributions

Qualifying as self-employed for super purposes and understanding the rules about loans to an SMSF.

Summary: There are two tests to pass before a contribution can be regarded as a tax-deductible concessional self-employed contribution. Under the first, a person cannot receive any super support from an employer over a financial year. The second test allows a person to qualify as self-employed if they only received minor employer super support during a financial year.

Key take-out: To pass the second test, employment income – including salary, wages, exempt income, reportable fringe benefits and reportable employer super contributions – must be less than 10 per cent of a person’s total assessable income.

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

Making self-employed super contributions

You recently wrote: “For a person to make self-employed tax-deductible super contributions they must either not be eligible to receive employer sponsored contributions, or their employment income is less than 10 per cent of their total taxable income.” Is this correct?

My understanding is that concessional contributions could be claimed if employer contributions were made as long as the total of employment income, reportable fringe benefits and employer contributions did not exceed 10 per cent of their total taxable income.

Answer: You are right about the 10 per cent test but in fact there are two tests that must be passed before a contribution can be regarded as a tax-deductible 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 harsh 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.

If only the second test applied someone who is working as a contractor, and therefore believed they did not have any employment income, would think that they would pass the test because none of their assessable income would be made up of employment income.

If the ATO as a result of conducting an SGC audit, ruled that the contractor was in fact an employee, the employer would be required to make SGC super contributions and the deductions claimed by the contractor for self-employed super contributions would be disallowed.

This is not a hypothetical case as many years ago I had a client who works for one company as a contractor installing air conditioners. That company did receive an SGC audit and my client’s deductions for self-employed super contributions were disallowed. Thankfully my client worked with a number person and contracted as a partnership, which means the SGC rules did not apply and the self-employed super contribution was reinstated.

Where someone is age 65 or older in addition to passing one of the two tests to make self-employed super contributions the work test must also be passed. This means that if someone is only earning passive investment income and they are aged 65 or older, despite being able to pass the 10 per cent employment income test, they would not be able to make a tax-deductible contribution.

Lending to an SMSF

Am I able to loan my SMSF cash in order to take advantage of investment opportunities as they arise? I understand that the loans must be paid back in the same financial year or else they will be treated as non-concessional contributions, is this correct? I have done this several times previously but have just heard that the government has changed the rules.

My SMSF owns a $50,000 parcel of commercial bonds which are about to be called early by the company and paid out in October 2015. In August 2015 they announced a new bond issue at a lower coupon rate. As I did not have $50,000 of at-call cash sitting in my SMSF, I loaned the fund the $50,000 from my private account which I will repay once the original bonds are paid out in October. Is this okay and above board to do this?

Answer: One of the biggest changes introduced that affected SMSFs was the introduction of a new penalty regime. The penalties imposed range from 5 penalty units for lesser breaches up to 60 penalty units for major breaches. Each penalty unit is $180.

There are only three breaches where the higher fine will be imposed. They relate to the ban on super funds lending to members, the restriction on a fund borrowing money other than is exempted under the SIS Act (such as the limited recourse borrowing arrangements) and for breaches of the in-house asset rules.

The only times a super fund can borrow under the SIS Act are:

  • to pay any surcharge obligations the fund may have, provided the fund uses any cash reserves first, and provided the debt is less than 10 per cent of the total assets of the fund, and is only maintained for a period of up to 90 days
  • to pay out benefits to a member if the loan is not for longer than 90 days and it does not exceed 10 per cent of the market value of the super fund, and there are no other cash assets of the fund to make the benefit payment
  • after exhausting the cash in the fund to pay for an investment, if the fund is experiencing unexpected short-term cash flow problems and the loan is not for longer than seven days and does not exceed 10 per cent of the market value of the super fund, a loan to pay for an investment after it was purchased
  • when a super fund meets the conditions set out in the Act relating to limited recourse borrowing arrangements.

Before the law changed on 24 September 2007, super funds could invest in managed funds that had borrowings. In this case the only thing at risk was the investment rather than the entire super fund.

The new legislation that applied from September 2007 did not change the long-term rule that prohibits super funds from borrowing. It did however introduce an exception to this rule under the following very tight conditions:

  • The borrowing must be related to the purchase of an asset that the trustee of the super fund is allowed to purchase.
  • The asset acquired is to be held on trust so that the fund receives a beneficial interest in the asset.
  • The legal ownership of the asset can pass to the super fund after it has made one or more payments or instalments.
  • The loan taken out by the trustee of the super fund must be a non-recourse loan, which means the lender only has a claim on the asset purchased and not the other assets of the super fund.

On the question of your loan to your SMSF, I recommend you seek professional advice about your personal situation.


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.