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Understanding — Contributions, Contributions Caps and Reserves

Sep 2009
Kate Hocking
 

What are reserves?

Superannuation law authorises the trustee to establish one or more reserve accounts for a fund. A reserve account is an account used by the trustee to set aside surplus assets of the fund which are not directly for the benefit of a member. Until amounts from a reserve are credited to a particular member's account in the fund, they do not constitute part of a member's benefits.

Trustees must ensure that reserves are managed in a manner consistent with the investment strategy and with the fund's ability to meet its liabilities.[1]

Transfers from reserves can be:

  • assessable, which means they count towards a member's concessional contributions cap; and
  • non-assessable, which means they count towards a member's non-concessional contributions cap.

Why would an SMSF use a reserve?

Placing contributions received by a fund into a reserve allows the trustee time to:[2]

  • identify the source of the contribution and its nature (employer, personal or spouse);
  • determine whether the member requires immediate allocation of the contribution, or a delay (within the legislative time requirement, see article here) in the allocation of that contribution;
  • determine whether the contribution is able to be retained by the fund (for example if it exceeds the relevant non-concessional contributions cap); and
  • determine whether the contribution should be refunded, if any specific provisions of the fund's trust deed require it to be refunded (for example the contribution would otherwise have resulted in a breach of the relevant concessional or non-concessional cap for the member for the year).

What are contributions caps?

The caps apply to limit the amount of contributions that receive favourable tax treatment that a member can make for a financial year.[3] If a member's contributions exceed the relevant cap, then the individual concerned is taxed on the excess.[4] Each year, the caps are adjusted to reflect inflation.

The amount of a member's cap — and the extra tax they pay if they exceed it — depends on whether the contributions are concessional or non-concessional contributions.

It is important to note that defined benefits funds and untaxed super funds (often referred to as "constitutionally protected" funds), are governed by special rules about contributions.

What are concessional contributions?

Concessional contributions are generally made to a fund for, or by a member, in a financial year and are included in the assessable income of the fund — for example: super guarantee contributions, salary sacrificed amounts and any amount a member is allowed as a personal super deduction in their income tax return. As they are contributions from before-tax income, or for which a tax deduction has been claimed, they are taxed when paid to the fund.

What are non-concessional contributions?

Non-concessional contributions are generally made to a complying fund by, or for, a member in a financial year and are not included in the fund's assessable income, as they are contributions from after-tax income.

The ATO has explained that non-concessional contributions include:[5]

  • personal contributions that a member isn't allowed to claim as an income tax deduction — this includes personal contributions made to defined benefit funds and untaxed (constitutionally protected) funds;
  • contributions a member's spouse (including a same-sex spouse) makes to their fund, unless the spouse makes contributions because they're the member's employer;
  • contributions in excess of a member's concessional contributions cap - that is, their excess concessional contributions;
  • contributions in excess of a member lifetime super capital gains tax (CGT) cap amount;
  • amounts transferred from foreign funds, excluding amounts included in the fund's assessable income;
  • any contributions made from 10 May 2006 that have not previously been counted as non-concessional contributions if the fund changes from being a non-complying fund to a complying fund;
  • contributions made for a member who is less than 18 years old, other than contributions made by their employer;
  • contributions made when the balance of a member's First Home Saver Account (FHSA) is transferred to their super account, including any FHSA government contributions included in the balance or paid after that; and
  • contributions from a member ex-spouse's FHSA paid under a family law obligation.

Further, non-concessional contributions do not include:

  • the super co-contribution;
  • contributions arising from certain structured settlements or orders for personal injuries that result in permanent incapacity;
  • contributions up to a lifetime limit of $1 million (indexed) arising from the disposal of qualifying small business assets under the CGT small business exemptions;
  • contributions made to a constitutionally protected fund that would have been assessable income of the fund if the fund was a taxable super fund — for example: employer contributions made to an accumulation fund that is constitutionally protected;
  • contributions to a public sector super scheme that are not included in the fund's assessable income because of a choice made by the scheme's trustee (sometimes called last minute contributions);
  • a rollover or transfer of a super benefit between complying funds, and
  • the tax-free component of a directed termination payment.

How much tax is payable on a contribution to an SMSF?

The rate of tax assessable on a contribution to a SMSF depends on:

  • the total amount of contributions made to the fund in the relevant tax year; and
  • whether that amount exceeds certain 'caps' set by the law.

The non-concessional contributions cap for an income year is a multiple of the concessional contributions cap.[6]

For the 2009-2010 tax year, the contributions caps and tax rates are as shown in the table:

Contributions caps and tax rates[7]

Concessional cap*

Transitional concessional cap

Non-concessional cap

2009-10 financial year

$25,000

$50,000

$150,000

Tax on amounts over the cap

31.5% (in addition to the 15% paid by the super fund)

31.5% (in addition to the 15% paid by the super fund)

46.5%

Other information

Any concessional contributions in excess of the cap will also count towards the non-concessional contributions cap

Any concessional contributions in excess of the cap will also count towards the non-concessional contributions cap

If a member is under age 65 at any time during the financial year in which the contribution is made, then they can bring forward two years of contributions. Effectively allowing the member to contribute up to three times the cap at once, or at any time during the three financial years.

Is there a transitional cap for people aged 50 or over?

Until 30 June 2012, a transitional concessional contributions cap applies for people aged 50 or over.

If a member is aged 50 or over, the annual cap for the 2009-10, 2010-11 and 2011-12 financial years is $50,000.

If a member has more than one fund, all concessional contributions made to all their funds are added together and count towards the cap. This cap is not indexed.

Will the caps change?

From the 2010-11 financial year, the non-concessional contributions cap will change as the concessional cap changes with indexation to reflect inflation.

When are allocations from reserves counted against a member's concessional contributions cap?

The Income Tax Assessment Regulations[8] provide that an allocation from reserves to a member's account within the fund is counted against the member's concessional contributions cap for the year unless:[9]

  • the amount is "fairly and reasonably" allocated to all members of the fund or the segment of the fund to which the reserve relates, and the allocation represents less than 5% of the relevant members' account balances; or
  • the allocation relates to the operation of what is essentially a defined benefit pension reserve for the member.

You can read about how can you allocate a single contribution across two financial years here

What happens if a member exceeds their contributions cap?

If a member exceeds a contributions cap, then the ATO will send them:

  • an excess contributions tax assessment; and
  • a release authority to authorise the release of up to the tax amount from their super fund. The correct amount must be released on time or penalties may apply.

More information from Maddocks

For information please call Maddocks in Melbourne (03 9288 0666) or Sydney (02 8223 4100) and ask for a member of the Maddocks Tax and Revenue Team or Superannuation Team.

More Cleardocs information on SMSFs

Read

You can read earlier ClearLaw articles on a wide range of SMSF topics here.

Order SMSF related document packages

Set up an SMSF
Update an SMSF deed
Set up an SMSF pension
Arrange SMSF borrowing lending docs:

Set up an SMSF corporate trustee

SMSF Death Benefit Nomination — binding or non-binding
An SMSF Death Benefit Agreement — binding and permanent

Download

Download a checklist of the information you need to order a document package


[1] Superannuation Circular No. 11 D1, issued March 2006, paragraph 96. See section 52(2)(g) Superannuation Industry (Supervision) Act 1993.

[2] Crump, P., 4.1 Contributions Reserve, Pension Death Benefits: Anti-Detriment, Reserving Strategies.... and other issues, 4th Annual Self Managed Super Funds Conference, September 2009, pg 6.

[3] section 280-15(1) ITAA 1997.

[4] section 280-15(2) ITAA 1997.

[5] Super contributions - too much super can mean extra tax, ATO, available at: http://www.ato.gov.au/superfunds/content.asp?doc=/content/00106372.htm&page=7&H7.

[6] See subsection 292-85(2) of the Income Tax Assessment Act 1997.

[7] Super contributions — too much super can mean extra tax, Australian Taxation Office, available at: http://www.ato.gov.au/superfunds/content.asp?doc=/content/00106372.htm

[8] The Income Tax Assessment Regulations 1997 sub-regulation 292.25.01.

[9] Crump, P., 4.1 Contributions Reserve, Pension Death Benefits: Anti-Detriment, Reserving Strategies.... and other issues, 4th Annual Self Managed Super Funds Conference, September 2009, pg 9.

[*] The $25,000 concessional cap will be indexed annually from 2010-11 onwards to average weekly ordinary time earnings (AWOTE) and rounded down to the nearest multiple of $5,000.

 
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