SMSF Contributions Rules: Implications and what to look out for
* Post Election update *
The impact of the 2016 Budget on SMSF compliance cannot be overstated.
New rules applying from Budget Night and from 1 July 2017 have created many new issues to be aware of when managing your clients’ SMSFs.
A. Changes to Apply from Budget Night
Lifetime cap for non-concessional superannuation contributions
Post Election Update: The Prime Minister has indicated that there will be consultation and work on transitional and implementation issues before the final legislation is presented to parliament. We will keep you updated of any changes to the proposed lifetime cap.
The Treasurer has also indicated that the final legislation will contain transitional provisions to protect those SMSF’s which have entered into contracts pre budget night that would otherwise result in a breach of these new rules (ie LRBA arrangements that rely on future NCC contributions to meet loan repayments).
A lifetime non-concessional contributions cap of $500,000 will be introduced. To ensure maximum effectiveness, the lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007, from which time the ATO has reliable contributions records, and will commence at 7.30 pm (AEST) on 3 May 2016.
The lifetime non-concessional cap will replace the existing annual caps which allow annual non-concessional contributions of up to $180,000 per year (or $540,000 every three years for individuals aged under 65).
Contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed or be subject to penalty tax.
The measure, which will be available to all Australians up to age 74, will provide support for the majority of Australians who make non-concessional contributions well below $500,000 and flexibility around when they choose to contribute to their superannuation.
B. Changes to Apply from 1 July 2017
There are four key changes to note relating to superannuation contributions. These proposed measures will apply from 1 July 2017 – and we take a look at each in more detail below.
- Reduction in Concessional Contributions Caps
- Harmonising contribution rules for people aged 65 to 74
- Catch-up concessional superannuation contributions
- Restrictions on personal superannuation contribution deductions eased
1. Reduction in Concessional Contributions Caps
From 1 July 2017 the annual cap on concessional superannuation contributions will be reduced to $25,000 (currently $30,000 under age 50; or $35,000 for ages 50 and over).
| < 49 on 30 June prior year | 49 + on 30 June prior year | |
| 2015/2016 | 30,000 | 35,000 |
| 2016/2017 | 30,000 | 35,000 |
| 2017-2018 | 25,000 | 25,000 |
** What to look out for **
Take care if entering into a contribution reserve strategy, as the change in thresholds between years could result in excess contributions.
2. Harmonising contribution rules for people aged 65 to 74
From 1 July 2017, the current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement will be removed.
People under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse.
Currently, there are minimum work requirements for Australians aged 65 to 74 who want to make voluntary superannuation contributions.
In addition, spouses aged over 70 cannot receive contributions.
The government will remove these restrictions and instead apply the same contribution acceptance rules for all individuals aged up to 75 from 1 July 2017.
3. Catch-up concessional superannuation contributions
With effect from 1 July 2017, Individuals with a superannuation balance less than $500,000 will be allowed to make additional concessional contributions where they have not reached their concessional contributions cap in previous years.
Amounts are carried forward on a rolling basis for a period of five consecutive years, and only unused amounts accrued from 1 July 2017 can be carried forward.
The measure will allow people with lower contributions, interrupted work patterns or irregular capacity to make contributions, eg parents or carers, to make “catch-up” payments to boost their superannuation savings.
4. Restrictions on personal superannuation contribution deductions eased
From 1 July 2017 all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions,
This effectively allows all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to their concessional cap.
Individuals who are partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements, will benefit from these changed arrangements.
** What to look out for **
Greater scrutiny will be needed to ensure the Fund is treating contributions correctly.
Notice and acknowledgments of intention to claim deductions will have greater prevalence.