It’s just weeks until the curtain draws on the 2019/20 financial year. But before it does, here is a checklist of 10 items to consider for an SMSF before it’s too late.
1. Concessional (tax deductible) contributions
Check concessional contributions and top them up. This financial year, there’s an opportunity to bring forward the left-over concessional contributions that weren’t claimed last year and add them to this year’s standard amount. While most people have a standard concessional contribution cap of $25,000, if the total super balance on 30 June 2019 of less than $500,000, leftover concessional contributions that haven’t been used since 1 July 2018 can be added to the standard concessional contribution of $25,000. But don’t forget, any contributions made by an employer or by salary sacrifice to an SMSF are counted towards the concessional contributions cap.
If a tax deduction is going to be claimed for personal contributions to super, an election must be made to the superannuation fund so it will be included in the fund’s taxable income. The fund is required to acknowledge the election and the person making the claim is required to give it to their tax adviser so the correct amount will be claimed as a tax deduction. The election is required to be given to the fund before lodgement of an individual’s income tax return, or at the end of the financial year after the contribution has been made, whichever happens first. However, should a person decide to roll over their super to another super fund to start a pension, the election must be made prior, otherwise the deduction may be disallowed.
2. Non-concessional (non-deductible) contributions
A person intending to make non-concessional contributions to their super, for this financial year it will depend on their age at the time of making the contribution, as well as their total super balance on 30 June 2019. If a person is under the age of 65, the person may have the opportunity to bring forward the next two years’ standard non-concessional contribution of $100,000. This means a person may be able to make a non-concessional contribution of up to $300,000 over a fixed three-year period commencing from the year in which a contribution greater than the standard non-concessional contribution has been made.
But there is a catch. The three-year bring forward amount applies only if a person’s total super balance on super on 30 June 2019 is less than $1.4 million. If a person’s total super balance was between $1.4 million and $1.5 million, they would only be entitled to bring forward just one year’s standard non-concessional contribution. If a person’s total super balance was between $1.4 and $1.5 million, the non-concessional contribution is limited to $100,000. It is not possible to make non-concessional contributions to a super fund with a total super balance of $1.6 million, otherwise a tax penalty will apply.
3. Making sure the super fund can accept the contribution
For persons older than the age of 65 this financial year and who wish to make personal contributions to super, they must meet a work test of at least 40 hours over 30 consecutive days, at any time during that financial year. This applies for personal concessional and non-concessional contributions. In the year a person reaches the age of 65, there is no requirement to meet the work test if they wish to make contributions prior to the age of 65. There are exceptions to the work test that apply to personal contributions made in the year after a person ceases gainful employment, or where personal contributions are made for purposes of the downsizer contributions. Personal superannuation contributions cannot be made to a super fund 28 days after the month in which the person reaches the age of 75. The only exception to the age of 75 limitation is for downsizer contributions made after the age of 65, which must be made to the fund within 90 days after the sale of a person’s main residence.
From 1 July 2020, the age for work test has been changed to the age of 67. This will allow anyone to make concessional and non-concessional contribution to super without meeting a work test up to the age of 67.
4. Don’t leave contributions to the last minute
The last day of the financial year falls on a Tuesday, 30 June 2020. If a person is considering to make a contribution to their super fund, they should do this well before 30 June to be sure the contribution will be treated as received in the 2019/20 financial year. This is essential when it comes to making contributions by electronic transfer. The ATO’s view on electronic transfer of contributions is that a contribution made by an electronic transfer will be considered as being received by the super fund only after the amount transferred has been credited to the superannuation fund’s bank account. So, making the transfer three-to-four working days before the end of the financial year is considered essential for the contribution to be made in time.
If a person has salary sacrifice arrangements in place and has used all of their concessional contribution cap, should confirm with their employer as to when the electronic payment of the contribution will be made. This allows them to work out whether or not the contribution will make it to an SMSF’s bank account by 30 June 2020 and consequently be treated as a 2019/20 contribution and included towards the person’s 2019/20 concessional contribution cap.
If the contribution is not credited to an SMSF’s bank account until after 30 June 2020, it will not be included in the person’s 2019/20 concessional cap. This may end up requiring an unnecessary adjustment to salary sacrifice arrangements. A person should that care should be taken with contributions made by electronic transfer on 30 June 2020 as they are most likely not going to show as a deposit in an SMSF’s bank account until 1 July 2020 or after. This is too late for the 2019/20 income year.
Making a contribution the old fashioned method by cheque may give a solution for last minute contributions. The ATO accepts that where a contribution is made by cheque, the contribution is treated as made once the cheque is received by the fund. As long as the cheque is promptly banked and honoured it will be accepted as made in the year the fund received the cheque.
As an example, if a cheque is drawn and given to the SMSF trustee on 30 June 2020 then banked promptly soon after the beginning of the next financial year, it will be recorded as a contribution made to the fund in the 2019/20 financial year. The deposit will not be recorded in the SMSF’s bank statement until after 30 June 2020.
Now let’s consider a contribution made as an EFT from a member’s personal bank account on 30 June 2020, which is shown in the SMSF’s bank account on 1 July 2020. In this situation the ATO would view the contribution to be made in the 2020/21 income year and not treated as a contribution for the 2019/20 financial year.
As you can see, the method used to contribute close to 30 June and when it is received by the fund, can have an impact on which income year the contribution is recorded as received by the SMSF. However, to remove doubt, the best practise is to make sure the contribution is shown as a deposit in the fund’s bank account no later than 30 June 2020.
5. Spouse contributions – can you access the $540 tax offset?
If a spouse’s income is below the maximum $37,000 threshold and less than the age of 70, then their husband or wife may be eligible for a tax offset of up to $540 for non-concessional contributions they make on their spouse’s behalf. For each $1 of spouse contribution that is made, up to a maximum of $3,000, then a tax offset equal to 18% of the contribution is available (maximum of $3,000 x 18% = $540).
The spouse’s income includes assessable income, reportable fringe benefits and reportable employer super contributions. The maximum tax offset is available if their assessable income is no more than $37,000 but the amount of the tax offset is phased out between $37,000 and $40,000 on a dollar-for-dollar of contribution basis.
If a spouse is between the ages of 65 and 70, they must meet the ‘work test’ (previously discussed above at item 3). For the 2019/20 financial year, a spouse contribution cannot be accepted by the fund once a person’s spouse turns 70. Whilst these rules apply to the receiving spouse, there are no work, age or income conditions applying to the contributing spouse.
From 1 July 2020, the maximum age at which spouse contributions can be made to the fund is to increase to the age of 75. This means that a wife or husband can make non-concessional contributions for a spouse who meets the work test between the ages of 65 and 75.
6. Co-contribution from the government of $500 for low-income earners
Despite being downsized over the years, the government’s super co-contribution remains one of the handouts for personal non-concessional contributions made by low income earners. For anyone who qualifies, the co-contribution is a payment made by the government to a person’s super fund, including an SMSF.
To qualify for the co-contribution:
- The person’s income must be less than $53,564 to qualify. The full co-contribution is available if the person’s income is below $38,564. For personal income between $38,564 and $53,564, the maximum co-contribution is reduced by 3.333 cents for every $1 in excess;
- At least 10% of the person’s income must come from employment-related activities or they must be carrying on a business (i.e. self-employed);
- The person must make a personal (non-deductible) super contribution – which is matches by the government on a $1 for every $2 made, up to a maximum personal super contribution of $1,000; and
- The person must be under the age of 71 at the end of the financial year.
The maximum co-contribution is $500, which is available if someone earns less than $38,564 and makes a personal super contribution of $1,000. Income for co-contribution purposes includes assessable income, reportable fringe benefits and reportable employer super contributions (most commonly, salary sacrifice amount).
7. Taking a pension
If a person is receiving an account-based pension, including a transition to retirement pension, the person should make sure they take at least the minimum payment amount by 30 June 2020. There can be significant taxation costs if they don’t – potentially as it could result in the earnings on all the assets supporting that pension will be taxed at the 15% tax rate, rather than being completely tax exempt. The minimum payment is a percentage of a person’s pension account balance as at 1 July 2019, which has reduced by 50% in March 2020, regardless of any changes in the account balance. If a pension commenced during the year, the minimum pension is pro-rata basis on the number of days remaining in the financial year. If a person’s account based or transition to retirement pension commenced on or after 1 June, the minimum pension is zero.
8. Make the pension payment by 30 June 2020
It is considered important to ensure pension payments are accounted for the 2019/20 financial year. If a pension payment at the end of 2019/20 is made via an electronic transfer it can easily result in that pension payment not going through until after 30 June 2020, and consequently included in the 2020/21 financial year. The ATO has outlined their views on the timing of pension payments, similar to their view on the timing of contributions, as outlined in section 4 above.
A person should ensure that if the SMSF is paying a pension, the required minimum pension payment is made well before 30 June 2020. As an example, a person is of the age of 76 on 1 July 2019 and receiving a pension from their SMSF is required to withdraw a minimum pension equal to 3% of the 1 July 2019 balance. That is, if their pension balance at 1 July 2019 was $500,000, the minimum pension for 2019/20 was originally equal to 6% of the opening account balance ($30,000) but the account balance was reduced by 50% due to COVID-19 to 3% and is now $15,000.
If the pension is a Transition to Retirement Pension, there is a minimum pension equal to 4%, reduced to 2%, of the opening account balance on 1 July 2019 but a maximum of 10% applies, which is not pro-rated. For example, a person aged 58, commences a Transition to Retirement Pension on 5 June 2020 with $400,000 will have a minimum required pension for 2019/20 of nil (as the pension commenced on or after 1 June in the income year). However, the maximum pension allowed will be $40,000, with no requirement to pro-rata.
It is also noteworthy that the 10% maximum limit for a Transition to Retirement Pension must consider any PAYG Withholding in relation to a pension paid to a person under age 60. Exceeding this 10% maximum limit for a Transition to Retirement Pension may result in the ATO taxing all the payments received by the member from the pension, at their personal marginal tax rate, regardless of tax components, the member’s age and with no 15% tax offset.
9. Pension payment must be cash
For a payment to be treated as a pension payment it must be made in cash and not be considered as a transfer of investments or fund assets. Any transfer of assets will be treated as lump sums from the commutation of the pension.
If a person is under the age of 60 and receiving a pension, including a transition to retirement pension, or the person is receiving certain lifetime and life expectancy pensions, the fund may be required to pay PAYG withholding. Any PAYG Withholding remitted to the ATO as part of the June 2020 Activity Statement counts as a payment in the 2019/20 income year and towards the 2019/20 minimum pension payment. Super funds are required to issue a PAYG Summary Statement to the member by the relevant due date. Where an SMSF has made a lump sum benefit payment to a member under the age of 60, PAYG Withholding may be payable.
10. Review the fund for possible compliance issues
Now is a good time for a review of the compliance of an SMSF and address any contraventions that may have occurred during the 2019/20 financial year. Common problems that could occur is when an SMSF has been instructed to lend money or provide financial assistance to members and relatives. This is considered to be a breach of the in-house asset rules. Trustees of an SMSFs who contravene the superannuation rules may be subject to the SMSF Penalty Regime. This could lead to substantial penalties, so if there are any issues, it is best to have them resolved before year end rather than get a knock on the door from the ATO auditor.
Another matter for review is the valuation of the fund’s assets as at 30 June 2020. While this may be a simple process for assets quoted at market price, like listed stocks and managed funds. If an SMSF has assets that are not on-market, such as real estate and collectables, it’s a good idea to line up the relevant assessors or valuers, where needed, early. External valuations may not be required every year, however, the superannuation law requires the trustee of an SMSF, to determine market value for each year’s annual financial statements.
Trustees of SMSFs are wholly responsible for their SMSF and while they are able to delegate their duties to accountants, tax advisers and other qualified professionals, trustees must ensure the fund complies with the tax, superannuation and related legislation.
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