The rules around superannuation and superannuation in SMSFs (Self Managed Super Funds) seem to change regularly. If you are an SMSF trustee, it is your responsibility to keep on top of changes to any superannuation rules.
While you can rely on your accountant or advisor for advice, you are the one responsible for the management of your SMSF. Thus, it’s important to keep on top of any changes as they can have significant impacts on the strategies that you are in process of implementing and your plans for the future.
IN THIS ARTICLE
What is Superannuation?
About Superannuation Contributions
Age Limits and Tests
Getting Money Out of Super
WHAT IS SUPERANNUATION?
Getting back to basics for a minute: what is superannuation? Superannuation is money set aside to provide you with income during your retirement. Generally, people start to accumulate super when they work as an employee as their employers are obliged to pay a ‘superannuation guarantee’ to an employee’s superannuation fund in addition to the latter’s salary or wages.
Many people think that superannuation is complicated. It might be that way as there are quite a few rules about how much you can contribute and what you can and can’t do. The bottom line is that superannuation is just a structure in which investments can be held. You can choose to put your superannuation money into an industry or retail fund and let others manage the investments for you. If not, may decide to manage your super by opening an SMSF.
Everyone has differing opinions on the pros and cons of super. If you are an employee, you have to do something with it, and it can be an effective structure to accumulate and preserve assets for retirement. Thus, even having a basic understanding of what you can and can’t do with your super is useful to help with your long-term planning.
ABOUT SUPERANNUATION CONTRIBUTIONS
Let’s talk about contributions. Successive governments seem to be making it harder to get money into the concessionally taxed super environment. However, there are still things you can do to build up your super.
Concessional or before-tax contributions are available to everyone. Your employer contributions and any salary sacrifice contributions you make are concessional. Any personal contributions that you make from after-tax dollars that you request to be treated as tax-deductible contributions are also concessional. This means they are not taxed at your nominal tax rate outside super but are taxed at the ‘concessional’ super tax rate of 15% when they go into your fund.
There is an annual limit but it may be a sound strategy, as and when you can afford it, to get as many concessional contributions into super as you can up to the limits. If you request some of your contributions to be treated as concessional, you are eligible to claim a tax deduction from them. The ATO requires you to lodge a notice of intent to claim from your super fund and have the notice acknowledged by the super fund before your lodge your tax return.
Catch-up Concessional Contributions
Those with super balances under $500,000 are allowed to make catch up contributions of unused limits over 5 years. Unused concessional caps will accrue from 1st July 2017 and can be taken advantage of after 1st July 2018. This is good news for women with disrupted work patterns or people who have larger assets outside of super that they sell closer to retirement.
The non-concessional contributions made with after-tax dollars are also available to everyone. Again, there is an annual limit but the limit is approximately 4 times higher than the concessional contribution limit. Also, there is the capacity to make three years’ worth of contributions in one year. However, this means that no further contributions can be made for the next 2 years.
If you have reached the eligible age, you may contribute funds from the proceeds of the sale of your home to your superannuation fund. This type of contribution is on top of your concessional and non-concessional annual limits. You must satisfy a range of criteria to make the contribution, the main one being that the home must be in Australia and that you or your spouse owned it for at least 10 years. The disposal must be exempt or partly exempt from capital gains tax.
AGE LIMITS AND TESTS
When you are planning your superannuation contributions as you are getting closer to retirement, keep in mind that there are rules that you need to consider. There is no age restriction on your super fund accepting mandated employer contributions. However, you need to meet some criteria for other contributions.
A super fund can only accept non-mandated contributions (salary sacrifice, personal contributions, downsizer contributions, for example) which are received on or before the day that is 28 days after the end of the month in which the member turns 75. Super funds can accept a non-mandated contribution for members between the ages of 67 and 75 only if they have met the work test requirements. That is, members have worked at least 40 hours within 30 consecutive days in that financial year.
GETTING MONEY OUT OF SUPER
Transition to Retirement Pension
One strategy to get access to your super money before you retire is called a Transition to Retirement strategy. This just means that a person who had reached their preservation age (anywhere from 55 upwards depending on your year of birth) could start a pension. Previously, this used to be a great tax saving device because the investment earnings on the assets used to support the pension weren’t taxable. But now, the investment earnings will be taxable in the fund at 15% so the tax effectiveness of starting a transition to a retirement pension may be lessened depending on the taxpayer’s circumstances.
RETIREMENT AND STARTING A PENSION
The superannuation laws impose several requirements to allow you to access your superannuation money. If you are over 60 and you retire, then there are no restrictions on the form in which you can take your benefits out of super. You could start a pension or take a lump sum. This is quite a complex area and we suggest you talk to your super fund if you have an industry or super fund or speak to your accountant or financial planner if you have an SMSF.
LIMITS TO PENSION ACCOUNTS
There is a maximum amount you can have in a tax-free super pension account which is called a transfer balance cap (TBC). Penalty tax rates will apply to any pension amounts greater than the maximum amount. This amount is subject to periodic indexation. This is a highly complex topic but it is important to be aware so that you and your accountant and financial planner can manage your TBC as you move from the accumulation phase to retirement.
Despite the application of the transfer balance cap, there is no restriction on the amount that you can have in the accumulation phase which is only taxed at 15%. Superannuation is and at least for the time being, will continue to operate in a concessionally taxed environment, making it a logical place to grow your wealth for retirement.
This article is for general information only. It does not make recommendations nor does it provide advice to address your personal circumstances. To make an informed decision, always contact a registered tax professional.