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Australia’s retirement income system includes significant tax concessions for superannuation. However, the rules are complex and too often I see contribution strategies unravel with additional taxes payable. Here’s my top 7 tips to avoid contribution problems.
Tip 1 - Check eligibility before tax
One of the fundamental rules I always emphasise when working with those new to super is to check eligibility to contribute before exploring the tax concessions which might be available. A contribution strategy purporting to save a say 68 year old client thousands in tax will come to naught if they don’t meet a work test and aren’t eligible to contribute to super.
Tip 2 - Make sure the people you think are employees actually are
Employers can only claim tax deductions for super contributions for employees. This means an individual needs to either be an employee for common law purposes or a deemed employee under the superannuation guarantee rules.
Problem areas I commonly see include:
- non-executive directors who aren’t entitled to payment under the company’s constitution,
- trust deeds which don’t allow for the individual trustees or directors of the corporate trustee to be employed by the trust, and;
- individual trustees or directors of a corporate trustee who aren’t engaged in producing the income of the trust or its business.
Tip 3 - Be alert for things which might not look like contributions but are
We are all familiar with clients making super contributions by transferring monies into the fund’s bank account, or if you’ve been around long enough, giving the fund trustee an old-fashioned cheque. Some of us will also have seen clients transfer assets into the fund’s name as an in specie contribution.
However, there are a number of other transactions which may also be considered contributions. For example, where a fund’s expenses are paid by the members or other entities and not reimbursed by the fund (even if they aren’t recorded in the fund’s accounts as a contribution).
Tip 4 - Be careful with timing
All too often I see clients inadvertently exceed a contribution cap or not get the tax deduction they thought they would because contributions are made in the wrong year. Contributions aren’t eligible to be claimed as a tax deduction until they are “received” by the fund. In the case of electronic fund transfers or contributions via a clearing house, this is generally not until the money is credited to the fund’s bank account which can be many days after the monies left the contributor’s account. The ATO has however provided some concessions here where contributions are made via the Small Business Super Clearing House (refer to our earlier blog).
The issue is further complicated for SMSFs because a contribution doesn’t count for cap purpose until the contribution is both received and allocated to the member’s account.
Tip 5 - Don’t assume non-deductible contributions will always be non-concessional contributions
Whether a contribution is regarded as a concessional or non-concessional contribution for cap purposes depends on whether or not the contribution is included in the fund’s assessable income. By default, contributions made by someone other than the member (eg the member’s family trust) (but excluding spouse contributions) will be included in the fund’s assessable income and counted towards the concessional contributions cap even if they are not tax deductible to the entity that made the contribution. Clients looking to achieve a different result would be wise to seek specialist advice.
Tip 6 - Watch total super balances
Since 1 July 2017, a number of super measures are dependent on the member’s total super balance (TSB) at the previous 30 June (eg their non-concessional contributions cap, their eligibility to use carried forward concessional contributions cap space). The ATO has previously recognised that this value will not necessarily be the same as the amount shown in an SMSF’s annual financial statements. Rather, there are a number of costs that could reasonably be taken into account for the specific purpose of determining an appropriate TSB value. For example, the costs of disposing of fund assets and the tax on any unrealised capital gains.
If it appears likely a client will exceed a relevant TSB threshold by a small amount, it may be worth reviewing their TSB calculation and reporting a revised amount in the SMSF Annual Return at the special labels X1 and X2. Ideally these adjustments are made prior to lodgement of the SMSF Annual Return rather than after an excess contributions determination has issued.
Tip 7 - Double-check member allocations before lodging returns
One of the other scenarios in which I am often called on for a second opinion is where a client has received an excess contributions determination and they now want their tax agent to change the allocation of that year’s contributions amongst the members. This can cause quite an ethical dilemma where the information on the tax agent’s files does not support an error in the member allocations but rather a moment of regret on the client’s behalf.
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