One area where trustees can get into trouble is when they do not properly understand the basics of superannuation law. After all, an SMSF is all about providing superannuation benefits for its members.
Any trustees that don't have a good working knowledge of superannuation law, and cannot answer correctly the following questions, will more than likely make at least one mistake that could prove costly.
- Who can make contributions?
- What types of superannuation are there?
- What are the different types of contributions?
One area where unsuspecting trustees of an SMSF can make mistakes is in relation to accepting super contributions from or on behalf of members.
This can include incorrectly accepting a contribution for a member not entitled to make one, or it can relate to the amount of the contribution received.
Apart from the limits placed on how much can be contributed, the ability to make superannuation contributions depends on the type of contribution and a person's age.
For the purpose of what contributions can be accepted by trustees there are two types of contributions, mandated compulsory employer contributions and non-mandated contributions.
Mandated compulsory employer contributions
Mandated contributions are amounts paid by an employer to a superannuation fund for them to meet their obligations under the Super Guarantee Charge Act. Non-mandated super contributions are all other contributions that employers, employees or members make.
Under the SGC Act up until June 30, 2013 employers were required to make a 9 per cent super contribution for their employees until they turned 70. For the 2014 financial year the SGC contribution rate increased to 9.25 per cent with there being no age limit on mandated super contributions. After that the rate is currently set to increase as follows:
SGC Contribution Rate
2015 to 2021
9.5 per cent
10.0 per cent
10.5 per cent
11.0 per cent
11.5 per cent
12.0 per cent
In addition to increasing the super contribution rate for employees the age restriction has been removed. Commencing on July 1, 2013 where an employee earns more than $450 a month the employer must contribute the SGC contribution for as long as they are employed.
Non-mandated voluntary contributions
These are contributions that are voluntarily made by members and employees. They include salary sacrificed as superannuation contributions, self-employed super contributions, and non-concessional after tax contributions. Under the rules non-mandated voluntary contributions can be made until a person turns 75.
The rules relating to non-mandated voluntary contributions for the relevant age groups are as follows:
Super contributions can be made by, on or behalf of, anyone as long as they are aged under 65 and they are within the contribution limits.
Aged 65 to 74
Contributions for people in this age group can only be accepted by a super fund if the person has worked during a year. To be classed as having worked a person must pass a work test.
The work test requires a person to work 40 hours in no more than 30 consecutive days in the financial year the super contribution is made. The work must be for payment and cannot be volunteer work. Any work done will qualify and it does not have to be work a person would normally do.
For example Albert has been a brain surgeon during his working life. He retires at 63 and as a result of selling a holiday home has a lump sum he would like to contribute to his SMSF when he is 68. He answers an ad for people to deliver advertising material into letter boxes. Over a 30 day period Albert spends 15 hours a week delivering pamphlets. Over a 4 week period he has worked 60 hours, earns the princely sum of $400, but has passed the work test.
Aged 75 and over
Once a person has turned 75 no further non-mandated voluntary contributions can be made by them. Trustees of SMSFs should therefore make sure that once any member turns 75 no further contributions, other than mandated SGC contributions, are received by the fund. As long as a person has met the work test in the year they turn 75 a super fund can accept a contribution for them up to 28 days after the end of the month in which the member turned 75.
There are two main types of benefits, and three sub categories that can apply to each main type of benefit, a superannuation benefit in a fund can be made up of. The two main types are taxable and tax-free. Trustees of an SMSF must understand that each type of super benefit determines when and how it can be paid out.
Technically speaking the taxable benefit component of a person's superannuation is calculated by subtracting the total of a member's tax-free benefits from the total value of their superannuation.
In practical terms the taxable portion of a member's benefit will be made up of concessional contributions and accumulated income. Over the life time of a super fund the taxable benefits increase as a result of concessional contributions and the member's share of the net income made by the fund each year.
The value of these benefits decreases as a result of benefits paid out and when there is negative income or a loss is made in a year. A loss can occur when administration costs and investment losses exceed investment income, or the value of the funds investments decrease, such as happened through the GFC, and a large unrealised loss is made on the investments.
The tax-free portion of a member's benefit was required to be calculated at July 1, 2007 when the new superannuation system started. Its value consisted of their superannuation account at 1 July 2007 that related to their pre-1983 service, undeducted/non-concessional contributions received, small business capital gains tax retirement exemption contributions and the post June 1994 invalidity component.
For a super fund in accumulation phase the value of tax-free benefits increase for members only by new non-concessional contributions received and capital gains tax exempt contributions. They decrease as a result of benefit payments made to a member. Once a super fund starts paying a pension the member's tax-free benefits percentage stays the same as it was when the pension started.
For example Clark is 64 and Lois is 60 and they have an SMSF. Clark has decided to retire and start an account based pension. At the time the pension commences he has $300,000 in superannuation, which is made up of $210,000 or 70 per cent in taxable benefits and $90,000 or 30 per cent in tax-free benefits. For the entire time that his pension is paid Clark's superannuation will always be made up of 70 per cent taxable benefits and 30 per cent tax-free benefits.
Preservation of benefits
The whole purpose of the sub-categories of super benefits is to restrict a member's access to superannuation until they have a right to use it. As the history of superannuation has shown super is meant to provide an income in retirement. As such the three sub-categories dictate to super fund trustees whether a benefit can be taken at any time, or a condition of release must be met. Conditions of release are explained in the “When can a member access their superannuation?” section.
The three sub-categories of benefits are:
- Restricted non-preserved, and
- Unrestricted non-preserved.
Since July 1, 1999 all super contributions for members under 65, and income earned by a fund on their super accounts, are preserved. The legal way that preserved benefits are defined by APRA in its circular titled “Payment standards for regulated super funds”, is as follows:
"A member's preserved benefits will be the residual amount of:
- the members total benefits; less
- the members restricted non-preserved benefits and the member's unrestricted non-preserved benefits in the fund.”
This means that unless a member has met a condition of release previously all of their benefits will be preserved.
This preserved amount will be made up of the different types of contributions received by the super fund, both concessional and non-concessional, and accumulated income earned by the fund. At times of negative investment returns, where an investment loss exceeds the total of a members preserved benefits, the loss is first allocated against the member's restricted non-preserved benefits, and then if there are still losses against unrestricted non-preserved benefits.
At the risk of repeating myself, because this is such an important point for trustees of a SMSF to understand, preserved benefits remain preserved and not accessible by a member until a condition of release is met.
Restricted non-preserved benefits
Thankfully not many SMSFs have this type of benefit. They include undeducted (non-concessional) contributions made before 1 July 1999 and benefits accumulated in certain sponsored super funds established before 22 December 1986. These benefits cannot be withdrawn until a condition of release has been met that does not have a cashing restriction.
Unrestricted non-preserved benefits
These are benefits that have remained in a super fund after a member has met a condition of release and no cashing restriction applies.
Some conditions of release cannot be taken as a lump sum or a pension, and as such have restrictions on how the benefit can be taken or cashed. These cashing restrictions are dealt with in the section detailing when a member can access their superannuation.
Those conditions of release with cashing restrictions include:
- Temporary residents permanently departing Australia;
- Severe financial hardship;
- Compassionate grounds;
- Temporary incapacity;
- Non-commutable pensions including a TTR pension; and
- Excess contribution release authorities.
Over the life of an SMSF trustees will receive several different types of contributions. These include, often in the order they are received by a super fund, the following:
Non-concessional contributions were once called, and were mainly made up of, undeducted super contributions. This basically means they are contributions to a super fund where no tax deduction is claimed for the amount contributed. In other words, and why they have ended up with the name they have, they are contributions that have not received a tax concession by being claimed as a tax deduction.
In addition to undeducted contributions non-concessional contributions also include:
small business capital gains tax exempt contributions,
personal injury payments,
Commonwealth Government co-contributions,
and spouse contributions.
The most frequent form of contributions that an SMSF will receive is concessional contributions. They can be received monthly or quarterly as employer superannuation guarantee contributions and salary sacrifice super contributions. They must be this frequent due to the legal requirement for super guarantee contributions to be paid quarterly within 28 days of a quarter finishing.
The other concessional contributions that can be received are self-employed super contributions and one off employer super contributions. The common factor for all four types of concessional contributions is that a tax deduction has been claimed for the amount paid. Thus a tax concession, the amount claimed as a deduction, has been received and hence their name of concessional contributions.
At some point in the life of most SMSFs a rollover payment will be received. Rollovers are simply the mechanism for transferring benefits from one super fund to another. When the rollover is from a taxed super fund there are no tax consequences for the SMSF receiving the contribution. When the rollover is from an untaxed fund tax is payable by the SMSF receiving the rollover.
The make up of a rollover will depend on what types of contributions have been made to the original super fund. The paying super fund must provide a rollover statement that states what the components of the amount rolled over are. They can therefore include both taxable and tax-free benefits.
In theory the trustees of the SMSF must ensure that the components of the amount rolled over are correctly allocated to the different types of benefit for the member receiving the rollover. In practice this is mostly done by the accountant or service provider that prepares the financial statements for the trustees.