Are there any limitations on who can make them? Understanding what type of contributions and how much can be accepted by your SMSF is critical, as the penalties for breaching these rules can quickly undo years of good work and undermine the ultimate goal of funding your retirement years.
As with all elements of running an SMSF, ultimate responsibility lies with you as a trustee, to understand the rules. But more than simply understanding, it is in your best interests to adhere to the rules in such a way that delivers the best benefit based on you and your fellow trustee’s specific circumstances.
Underpinning the rules are the two categories of contributions, mandated and non-mandated, and the two tax treatment categories, concessional and non-concessional.
The simplest form of contribution is the mandated employer contribution; these include the super guarantee contributions and are made under a law or industrial agreement. Your SMSF can accept mandated contributions for members at any time, regardless of their age or level of employment.
Keep in mind that any contributions made by employers over and above the super guarantee or award obligations; contributions made by a third party such as an insurer; personal contributions; and super co-contributions are considered non-mandated contributions.
Restrictions on non-mandated contributions into your SMSF relate in part to the member’s age and also to their working status. This is where the specific circumstances of you and your members start to come into play.
It is fair to say that, regardless of age, maximising contributions to superannuation in the accumulation period is encouraged by the rules, which reflects the intentions of astute SMSF trustees.
There are, however, limits placed on superannuation contributions, and exceeding these caps can result in an increased tax liability for the fund–working against the ultimate goal of your SMSF.
Again the limit, or contributions cap, depends on a member’s age and the type of contribution–either concessional or non-concessional.
If a member's contributions exceed the cap in either category, the amount over the cap is included in the individual’s assessable income, and taxed at their marginal tax rate.
The Australian Tax Office website has detailed information about how age, work status, and relationship status specifically impact contributions.
An example of an exception that may apply in certain circumstances relates to the disposal of certain small business assets. In essence the proceeds from the sale of certain small business assets may be contributed to your SMSF without counting towards your non-concessional contributions cap.
Another type of contribution worth noting is in specie (asset) contributions; the general rule is that you can’t acquire assets from related parties of the fund. A noteworthy exception to this rule is listed shares and securities.
Furthermore, transactions must be on an arm’s length basis. This means that fund assets must be bought and sold at market value, with any income on the assets providing a true rate of return.
The aim of pointing out some of the specific exclusions, exceptions and caveats on the rules is not about overstating the complexities inherent in administering your SMSF, but rather to highlight the importance of understanding the personal nuances.
Ensuring that you have a clear contributions plan tailored for your fund and its individual members will help set you up for a comfortable retirement– and not an unexpected tax bill.
Robin Bowerman, Head of Market Strategy and Communication, Vanguard Australia