Superannuation Contributions — A Guide

A one-stop shop for all main issues relating to superannuation contributions for SMSFs — with links to more information.

This article is a guide to superannuation contributions and summarises topics from earlier ClearLaw articles, including:

  • What is a contribution and how can it be allocated?
  • What is the difference between a concessional and non-concessional contribution?
  • What are the contribution caps and what are the penalties for exceeding them?
  • Why would an SMSF have a contributions reserve?
 

What is a contribution?

A contribution is made to an SMSF when:

  • a person contributes anything of value that increases the SMSF's capital; and
  • that person makes that contribution so as to benefit one, or more, or all members of the SMSF.

Typical contributions and when they are made

The most common way an SMSF's capital is increased is by a person transferring money to the SMSF trustee(s). Generally, the contribution will be made when the trustee(s) receive the money.

Here are the common ways that the Commissioner of Taxation[1] considers that a contribution to an SMSF will be made, and when:

No.

If the funds are transferred by ...

A contribution is made when ...

1

Making a cash payment (either in Australian or foreign currency) to the super trustee

The cash is received by the super trustee.

2

An electronic transfer of funds to the super trustee

The funds are credited to the super trustee's account.

3

Giving the super trustee a money order or bank cheque on which payment is made

The money order or bank cheque is received by the super trustee, unless the order or cheque is dishonoured.

4

Giving the super trustee a personal cheque (other than one that is post-dated) that is presented and honoured with cash or its electronic equivalent

The personal cheque is received by the super trustee, so long as the cheque is promptly presented and is honoured.

5

Giving the super trustee a personal cheque that is post-dated and that is presented and honoured with cash or its electronic equivalent

The cheque is able to be presented for the payment (that is, the date on the cheque), so long as the cheque is promptly presented and is honoured.

6

A related party (as maker) issuing a promissory note, payable on demand at face value, to the super trustee and the note is paid with cash or its electronic equivalent

The promissory note is received, so long as payment is demanded promptly and the note is honoured.

7

A related party (as maker) issuing a promissory note, payable on a future date at face value, to the super trustee and the note is paid with cash or its electronic equivalent

Payment is able to be demanded or required to be made, so long as the demand (if required) is promptly made and the note is honoured.

For more information about the meaning of superannuation contributions, see the earlier ClearLaw article 'Superannuation Contributions and Income Tax — for Self-Managed Superannuation Funds'.

Types of contributions: concessional and non-concessional

Concessional contributions — also known as before tax contributions — are generally made to an SMSF for, or by a member, in a financial year and are included in the assessable income of the SMSF. Examples of concessional contributions include: super guarantee contributions, salary sacrificed amounts and any amount a member is allowed as a personal super deduction in their income tax return.

Non—concessional contributions — also known as after tax contributions — are generally made to an SMSF by, or for, a member in a financial year and are not included in the assessable income of the SMSF. Examples of non-concessional contributions include: personal contributions a member makes from their after—tax income.

For more information about concessional and non—concessional contributions, see the earlier ClearLaw article 'Understanding Contributions, Contributions Caps and Reserves'.

Contributions caps and tax rates for the 2010—2011 financial year

The contributions caps and tax rates for this financial year are shown in the table below:

Concessional cap

Transitional concessional cap[2]

Non—concessional cap

2010-11 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 you are under age 65 at any time during the financial year the contribution is made, then you can bring forward two years of contributions, effectively allowing you to contribute up to three times the cap at once, or at any time during the three financial years.

Warning: tax consequences of exceeding the contributions caps

Excess contributions can be taxed at a rate of 93%, if you exceed both the concessional and non-concessional contributions caps in a financial year.

How can excess contributions possibly be taxed at 93%?

Based on the tax rates above:

  • Any contributions over the concessional cap are taxed at a rate of 31.5% plus the initial 15% income tax paid by the SMSF. We are already at 46.5%.
  • These excess concessional contributions are counted towards the member's non-concessional contributions.
  • If the member also exceeds the non—concessional contributions cap, then those contributions over the non-concessional cap are taxed at a rate of 46.5%.
  • This means, that contributions over the concessional cap that cause a member to exceed the non-concessional cap will be taxed at 93% (that is: 31.5% excess concessional contributions tax, plus 15% income tax, plus 46.5% excess non-concessional contributions tax).

As you can see, you should always ensure that contributions made to an SMSF are within the contributions caps.

Tax avoidance — a “big no no” for SMSF deeds

An SMSF deed must not contain provisions that allow for:

  • a separate trust to be set up to hold amounts paid in excess of contributions caps; or
  • amounts paid in excess of contributions caps to be repaid (with earnings) to members.

The ATO views these provisions as existing for the purpose of avoiding excess contributions tax and that any trustee(s) relying on those sorts of provisions may breach the sole purpose test[3] under section 62 of the Superannuation Industry (Supervision) Act 1993.

(By the way, the Cleardocs SMSF deeds do not contain those sorts of provisions.)

For more information about this issue, see the earlier ClearLaw article 'SMSF excess contributions tax avoidance: ATO targets dodgy deeds'.

Preventing excess contributions: allocating a single contribution over 2 financial years

To prevent exceeding the contributions caps for a financial year, an SMSF may (if it has a contributions reserve, see below) be able to allocate a single contribution over 2 income years.

Let's look at an example — assume:

  • On 15 June in Year 1, a member's non—concessional contribution of $100,000 is credited to a fund's "contributions reserve";
  • The next day on 16 June, $60,000 is allocated from the contributions reserve directly to the member's account;
  • As at midnight on 30 June in Year 1, of the initial $100,000:
    • o $60,000 has been allocated to the member's account, and
    • o $40,000 remains in the fund's contributions reserve; and
  • On 1 July (that is, in Year 2), the balance of $40,000 is allocated from the contributions reserve to the member's account.

The single payment across 2 years works because a non—concessional contribution is only counted against a member's cap from the date it is credited to a member's account (and not from earlier date on which the fund receives the contribution).

It is important to remember that if the trustee receives a contribution in a particular month, then the trustee must allocate the contribution to a member's account within 28 days after the end of the month or, if not practical to do so, within a longer period that is reasonable. This means that the 28 day period must span over two financial years for the above example to be effective.

For more information about allocating a single contribution over two financial years, see the earlier ClearLaw article 'Allocating a single Self Managed Super Fund (SMSF) contribution across two financial years'.

Other benefits of using a contributions reserve in an SMSF

To be able to allocate a contribution over 2 financial years (as above), the SMSF needs to have a contributions reserve in place. Further advantages of an SMSF having a contributions reserve in place are that it allows the trustee(s) time to:

  • identify the source of the contribution and its nature (employer, personal or spouse); and
  • determine whether the member requires immediate allocation of the contribution, or a delay (within the legislative limits) in allocating that contribution; and
  • determine whether the contribution is able to be retained by the fund (for example if it exceeds the relevant non-concessional contributions cap).

(By the way, the Cleardocs SMSF Deed allows the trustee(s) to set up a contributions reserve.)

More information from Maddocks

For questions or more information about the above article, please call Maddocks in Melbourne (03 9288 0555) and ask for a member of the Superannuation Team.

More Cleardocs information on SMSFs

You can read other articles concerning superannuation and SMSFs 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
SMSF Death Benefit Agreement — binding or permanent

Download

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

[1] See Taxation Ruling TR2010/1 — Income tax: superannuation contributions.
[2] The transitional concessional cap applies to persons aged 50 or over on 30 June in a financial year and is available until 30 June 2012.
[3] For the sole purpose of providing benefits to member on their retirement (or their death or incapacity).