© The SMSF Academy 2013

Webinar:

DEALING WITH SMSF CONTRIBUTIONS

Aaron DunnThe SMSF Academy

5 September 2013

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HOUSEKEEPING

GENERAL ADVICE WARNING

This presentation provides general advice only. No direct or implicit recommendations are given in this presentation. This means that the general advice provided has not been prepared taking into account any individual’s financial circumstances (i.e. investment objectives, financial situation and particular investment needs).

The SMSF Academy Pty Ltd believes that the information in this presentation is correct at the time of compilation but does not warrant the accuracy of that information. Save for statutory liability which cannot be excluded, The SMSF Academy disclaims all responsibility for any loss or damage which any person may suffer from reliance on this information or any opinion, conclusion or recommendation in this presentation whether the loss or damage is caused by any fault or negligence on the part of presenter or otherwise.

© The SMSF Academy, 2013

• What is defined as a contribution?• Acceptance of contributions (SISR 7.04)

– Fund capped amounts– Eligibility by age

• Assessability of contributions– Complying Fund Tax Rate– Additional contributions tax for high income earners– Low Income Super Contribution– Excess Contributions Tax (including refund mechanisms)

• Tax deductibility & timing in allocation of contributions• Contributions and the ‘caps’

– Working within age-based limits – Bring forward rule– Small Business CGT concessions

DEALING WITH CONTRIBUTIONS

CONCESSIONAL CONTRIBUTION CAP INCREASE• Temporary concessional contribution increase to $35,000 from 1 July

2013 for those 59 and over at 30 June 2013– Those less than 59 remain at $25,000

• From 1 July 2014, the temporary cap increases to $35,000 for those 49 and over at 30 June 2014 onwards

• ‘Temporary’ – not indexed and available until existing concessional contribution cap indexes to higher amount

• Replaces previously proposed extended cap from 1 July 2014 for those:

– 50 and over; and

– Account Balance of less than $500,000

• Backdated start date to 1 July 2012• For a member to be subject to the additional contributions tax

('surcharge'), they must have Taxable Contributions (TC). • This is defined as amounts than exceed the $300,000 threshold when

applying the following: 

Income for Surcharge Purposes (ISP) - Reportable Super Contributions (RSC)+ Low Tax Contributions (LTC)

‘Income for Surcharge Purposes’ is a similar definition to that which already applies for the Medicare Levy surcharge.

ADDITIONAL CONTRIBUTIONS TAX FOR HIGH INCOME EARNERS

$300,000$37,000

LISC – 0% Contributions tax at 15% Higher rate – 30%

Excess concessional contributions tax – 31.5% (until 1 July 2013)

LOW TAX CONTRIBUTIONS ABOVE THRESHOLD

YESIf an individual has TC for an

income year

If an individual in an income year exceeds the $300,000

thresholdISP – RSC + LTC > $300,000

Is an individual liable for Division 293

tax?

Does an individual have TC?

What are an individual’s LTC for a financial year?

TC = lessor of(1) LTC for the income year

(2) LTC in excess of $300,000There is no TC if LTC are nil

What is the amount of TC?

15% of TC

What is assessed Division 293 tax?

YESEligible for a refund of Division 293 tax paid and/or release

from liability for Division 293 tax

Has an individual received a DASP?

Special rules modify LTC for:• Defined benefit interests;

and• Certain individuals

TC = taxable contributionsISP = Income for Surcharge PurposesRSC = Reportable Super ContributionsLTC = Low Tax ContributionsLTCA = Low Tax Contributed AmountsECC = Excess Concessional ContributionsDASP = Departing Australia Super Payments

LTC = LTCA – ECCEffectively:Concessional taxed contributions to super interests less excess concessional contributions

LEGEND

• David’s income (income for surcharge purposes other than reportable super contributions is $315,000

• His low tax contributions are $25,000

• Combined income and low tax contributions are $340,000

• The amount of low tax contributions ($25,000) < combined income and low tax contributions ($340,000) less the $300,000 threshold (i.e. excess of $40,000)

ADDITIONAL CONTRIBUTIONS TAX FOR HIGH INCOME EARNERS

TC ($25,000)

$340,000ISP + RSC + LTC

$40,000 in-excess of $300,000 threshold

$25,000 in LTC

$300,000threshold

Determining the amount of taxable contribution

• Sabina’s income (income for surcharge purposes other than reportable super contributions is $285,000

• Her low tax contributions are $25,000• Combined income and low tax

contributions are $310,000• The amount of low tax contributions

($25,000) > combined income and low tax contributions ($310,000) less the $300,000 threshold (i.e. excess equals $10,000)

• Sabina’s taxable contributions are $10,000

DETERMINING THE AMOUNT OF TAXABLE CONTRIBUTION

$310,000ISP + RSC + LTC

$10,000 in-excess of $300,000 threshold

$25,000 in LTC

$300,000threshold

TC only – excess LTC $10,000

$15,000

• Mark’s income (income for surcharge purposes other than reportable super contributions is $285,000

• Mark made concessional contributions for 2012-13 of $40,000, meaning excess contributions of $15,000 (cap of $25,000)

• His low tax contributions are $25,000• The $15,000 of excess concessional

contributions are not included within the $300,000 threshold to determine whether Mark has taxable contributions

• These amounts are subject to ECT, not higher rate

EXCESS CONTRIBUTIONS

$310,000ISP + RSC + LTC

$10,000 in-excess of $300,000

threshold

$25,000 in LTC

$300,000threshold

ECC - $15,000

TC only – excess LTC $10,000

$15,000

$15,000 subject to ECT

ASSESSMENT AND PAYMENT

21 days

Individual lodges income tax return

SMSF Annual Return lodged

Commissioner issues notice of assessment & release authority to

individual

* ATO to issued notice of assessment ‘as soon as practicable’

Due and payable within 21 days of

notice being issued

GIC >21 days

Individual does not have to use release authority and can choose to pay from other sources

• Individual may give release authority to provider within 120 days of issue

• Provider must comply within 30 days of receiving the release authority

REMOVAL OF EXCESS CONCESSIONAL CONTRIBUTIONS TAX

• Excess concessional contributions tax legislation has been repealed from 1 July 2013

• Excess concessional contributions now to be included in an individual’s assessable income and subject to a charge to account for the deferral of tax

• Ability to elect to release ECC from super interest– Released amounts proportionately reduce individual’s NCC– Provides broadly equivalent position to individuals

INCLUDING EXCESS CONCESSIONAL CONTRIBUTIONS AIN ASSESSABLE INCOME

• Individuals only pay tax on their excess concessional contributions at their marginal tax rate

– Rather than at additional 31.5% tax rate (total 46.5%)

• Individuals entitled to a 15% tax offset of their excess concessional contributions

– Offset is not able to be refunded, carried forward or transferred

EXAMPLETerry (54) made total concessional contributions for 2013-14 of $50,000, exceeding his CC cap by $25,000.

The $25,000 excess concessional contributions are included within Terry’s assessable income for 2013-14.

Terry is entitled to a tax offset of $3,750 (15% of excess concessional contributions).

EXCESS CONCESSIONAL CONTRIBUTION CHARGE

• Individual with excess concessional contributions must pay a ‘charge’

• Charge is payable on the amount of an individual’s income tax liability for the income year that is attributable to the individual having excess contributions

• Need to take into account both the:– Increase in the individual’s income tax liability due to the inclusion of

their excess concessional contributions; and– Reduction in their tax liability due to the availability of the ECT offset

Excess concessional contribution charge

• In 2013-14, Mary’s taxable income is $80,000 which includes $10,000 of excess concessional contributions.

– Her marginal tax rate is 32.5% + 1.5% Medicare levy.

• Results in $3,400 of additional tax.• Mary is entitled to 15% tax offset on

excess concessional contributions– decreases her tax liability by $1,500

• Amount of Mary’s tax liability that is attributable to her excess concessional contribution is:

$1,900 ($3,400 - $1,500 = $1,900)

EXAMPLE

EXCESS CONCESSIONAL CONTRIBUTION CHARGE

Begins to apply on first day of the income year to which excess concessional

contributions are attributable

* or would be due if the individual has no liability for a year

Excess CC charge payable at same rate of SIC

Shortfall Interest Charge (SIC) is based on: 90-day bank accepted bill (RBA) plus a 3% uplift factor

Commissioner has no discretion to remit the excess CC charge

SIC on shortfall must include excess CC charge

Ceases to apply on the day prior to the

date on which a payment is due

under an individual’s first notice of

assessment for the year *

Shortfall interest being to apply from

day the liability under the original assessment was

payable

SIC ends on the day when individual pays the liability

under the amended assessment

1 July 2013 30 June 2014

CALCULATING THE EXCESS CC CHARGE

SIC – $42.12

1 Excess CC Charge = $1,900 x 5.59% x (686/365)days2 Shortfall Interest Charge = $1,900 x 5.59% x (686/365)days

1/5/2015Lodges

personal tax return

15/05/2015Tax liability paid here

31/08/2015Amended

assessment issued here

21/09/2015Payment due

within 21 days

Excess CC charge – $199.331

Matthew (62) lodges tax return on 1 May 2015 and pays tax liability on 15 May 2015.

On 31 August 2015, Commissioner determines Matthew has excess concessional contributions for 2013-14 and issues amended assessment.

On issuing amended assessment, Matthew is also liable for the excess CC charge & SIC

Matthew can release payment from super fund

If not paid on time, GIC will apply

Concessional contributions made totalling $45,000

(CC cap $35,000)

$10,000 refunded and included within assessable income

Matthew pays$2,141

($1,900 + $199 + $42)

ELECTING TO RELEASE EXCESS CONCESSIONAL CONTRIBUTIONS

Individual is entitled to release up to 85% of the amount of their excess concessional contribution for that financial year from their super fund (entirely at discretion of individual)0% 85%

Election to release must be made

within 21 days of receiving ECC

notice

Must be in the approved form and specify the amount

and from which super interest to be

release

Once made, the election cannot be revoked. Cannot seek to vary the amount of super

interest nominated

Upon receipt of valid election to release,

the Commissioner to provide a release authority for the specified amount

Super Fund must pay amount to Commissioner within 7 days of receiving the release

authority

IMPACT ON NON-CONCESSIONAL CONTRIBUTIONS

• Individual’s non-concessional contributions will continue to include their excess concessional contributions

• However, if election made to release an amount of excess concessional contributions, the amount reduce the individual’s NCCs

Calculated as:

100/85of the amount released

Where individual chooses to release the full 85% of their excess concessional contributions, there will be no impact of NCCs.

Ensure individuals always have an option to avoid excess NCCs, and can prevent auto-trigger of bring forward rule for those under 65 years of age.

• In 2014-15, Brian (66) has excess concessional contributions of $10,000

• As a result of these excess CCs, Brian now has $155,000 of NCCs and is in breach of his NCC cap

• Brian elects to release $4,300• This reduces his NCCs by $5,059

100 x $4,300 / 85 = $5,058.82 (to the nearest cent)

• As a result, Brian’s non-concessional contributions are $149,941.18. He no longer has excess NCCs

BRIAN’S EXCESS CONCESSIONAL CONTRIBUTIONS

IS IT WORTH BREACHING THE CONCESSIONAL CONTRIBUTION CAP?

… MAYBE

TRIS 60 & OVER

AND LOW INCOME

EARNERS

CONTRIBUTION HOLDING ACCOUNT

STRATEGY?

In a low interest rate environment, can the fund outperform the ECC charge & interest over the deferred period?

WHAT IS A ‘CONTRIBUTION’?

TR 2010/1

Transferring existing assets into the fund

Creating rights in the fund

Increasing the value of an existing asset in the fund

Paying an amount to a third party on behalf of the fund

Forgiving a debt owed by the fund

Shifting value to an asset owned by the fund

RESERVE ALLOCATIONS

Remember prior year contribution reserve amounts to avoid ECT

Disproportionate allocations

Amounts allocated that are more than 5% of value of fund assets at time of allocation

Concessional contributions must be grossed-up by 1.176

ALLOCATION OF CONTRIBUTIONS

INCOME TAX• Subsection 292-25(2) of ITAA

1997• A concessional contribution is

made in ‘respect of you’ and included within assessable income of the super fund

• Paragraph 7 of TR 2010/1 requires an objective determination of the contributor’s purpose, therefore by not immediately allocating does not fail this requirement

SUPERANNUATION LAW• Division 7.2 of the SIS Regs. 1994• SISR 7.08(2) requires a trustee

who receives a contribution in a month to allocate the contribution to a member:

– Within 28 days after the end of the month; or

– If not reasonably practicable to allocate to the member of the fund within the above period – within such longer period as is reasonable in the circumstances

Contribution holding account strategy – ATOID 2012/16

1 June 2013 30 June 2013 28 July 2013

$21,250 in Contribution

Holding Account $25k

allocated to Jenny’s account

Allocated to member

prior to 28 July

MEET JENNY Self-employed doctor with no concessional contributions made YTD

Net capital gain of $100,000 from sale of investment property

Wants to reduce CGT bill as far as possible

Contributes $50,000 (2 x payments)

Fund pays income tax

on $5ok contribution

s

Grossed-up amount reported as contribution in

following year

CONTRIBUTION HOLDING ACCOUNT APPLIES EQUALLY TO NON-CONCESSIONAL CONTRIBUTIONS

Contributions (cash or in-specie) must not be fund-capped

Cannot split a contribution (SISR 7.08(2))

ATOID 2012/79In-specie contributions of listed shares

• Off-market shares transfers to SMSFs are allowed to continue from 1 July 2013

• Stronger Super measure did not proceed

• ATOID 2012/79 provides clarity around same day in-specie contributions (e.g. listed shares)

• Does SISR 7.04(3) of SISR prevent trustees from accepting multiple parcels of shares made on the same day if the combined value exceeds a member's non-concessional cap for a financial year (i.e. fund-capped)?

ATOID 2012/79

• Ken (65) for 2011-12 financial year • Member of Ken & Barbie SMSF• Ken has met the work test for the financial year • Eligible to contribute to non-concessional contribution cap of

$150,000• 8th February makes following in-specie contributions of listed

shares into SMSF:• 2000 shares in ABC Ltd – total market value $42,000• 5500 shares in DEF Ltd – total market value $78,000• 3200 shares in XYZ Ltd – total market value $35,000

• For contribution cap purposes, do we aggregate the same day contributions or is each parcel a separate contribution?

EXAMPLE

• Commissioner confirms in interpretative decision that each parcel of shares is a contribution• Amount is not fund-capped (should it have been aggregated)

• Considers views of:• ATOID 2007/225: acceptance of fund cap contributions;

subregulation 7.04(3) of SISR applies on a ‘contribution-by-contribution’ basis

• Each share is in a different company, therefore disparate legal and/or beneficial rights exist and cannot be interchanged or substituted

• For Ken:• $5,000 is an excessive contribution and subject to ECT

EXAMPLE

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