The end of another financial year is only a few weeks away so it’s time to make sure you have everything ready to allow your SMSF’s 2020/21 financials and tax return to be completed without fuss. You are probably familiar with most of what’s required if you’ve had an SMSF for some years. But there are a few things you may need to pay more attention to due to COVID-19 issues, but that’s not all.
There are two main things to look out for with contributions, especially if you wish to maximise the amount you wish to make and staying within your concessional or non-concessional contribution caps.
For concessional contributions which are tax deductible, there is a universal standard cap of $25,000 that applies if you qualify. But if your total super balance on 30 June 2020 is less than $500,000 you can have the benefit of bringing forward any unused concessional contributions. These are the concessional contributions under the standard cap that haven’t been claimed since 1 July 2018.
Time frames are always important to pay attention to if you wish to claim a tax deduction for personal concessional contributions. An election must be lodged with your SMSF and is required to set out the amount you will be claiming. You must make the election before your personal tax return is sent to the ATO for the 2020/21 financial year and no later than the end of the financial year after the contribution was made. Remember there’s a bit of a twist as the election needs to be with the fund before any part of the contribution is withdrawn or used to start a pension. Also, your SMSF also needs to acknowledge your election before your personal income tax return goes to the ATO.
A major consideration in making non-concessional contributions (NCC) which are not tax deductible is your Total Superannuation Balance (TSB). Your TSB, which is the total amount you have in superannuation on 30 June in the previous financial year, limits the amount of NCCs you can make to super without incurring a tax penalty. If your TSB is more than $1.6 million a penalty will apply to any (NCC) you make and you could end up having to withdraw any excess that arises. You can find out your TSB from your tax adviser or by looking on your Mygov portal.
If you have a TSB of less than $1.6 million and you qualify to make NCCs to your SMSF, you may be able to contribute up to $100,000. However, if you are under 65 you may be able to access the bring forward rule which allows you to make NCCs of up to $300,000 over a fixed three-year period. The fixed three year period starts from the year you make an NCC of greater than the current standard amount of $100,000. If your TSB is less than $1.4 million in this financial year you can bring forward up to $300,000 over a fixed three year period, and if your TSB is between $1.4 million and $1.5 million it is possible to bring forward up to $200,000 over a fixed two year period. If your TSB is between $1.5 and $1.6 million then you are only able to make the standard NCC of $100,000 and if your TSB is at least $1.6 million you can’t make non-concessional contributions without a tax penalty applying.
If you have triggered the bring forward rule in either the 2018/19 or 2019/20 your total NCCs may be either $300,000 or $200,000 respectively provided you have not exceeded the maximum of your Total Super Balance as at 30 June 2020. If in doubt seek advice on the amount of NCCs you can make for this financial year as the rules can be confusing.
Indexation of caps – strategy and seeking advice
From 1 July 2021 the Total Super Balance will increase to $1.7 million and the standard non-concessional contributions will increase to $110,000. If you are under 65 and thinking of using the bring forward rule this financial year you may like to seek advice to see what strategy can provide you with the greatest benefit. Where the amount of the caps change there are nearly always strategic advantages out of the timing of non-concessional contributions. You may end up taking advantage of making contributions in June this year as well as the increased indexed amounts from 1 July.
Make sure at least the minimum pension is paid for any existing pensions and the maximum level is not exceeded for Transition to Retirement pensions. A pension that does not satisfy the payment rules will mean any income on assets supporting the pension will be taxed at 15% rather than be tax exempt.
When deciding to draw more than the minimum pension you may wish to consider taking any amount over the minimum as a pension payment or a lump sum. The reason is that lump sum commutations of your pension balance will result in a reduction of your Transfer Balance Account and can be used to access additional pension benefits in future.
You need to instruct your SMSF that you are drawing a lump sum prior to it being made from your pension balance, otherwise it will be treated as a pension payment. If you have more than one pension account or possibly an accumulation account in your SMSF, then part of the decision will be whether any additional payment comes from one or more of those accounts.
Some of the things to consider if you have multiple pension accounts is the tax-free proportion of each pension and whether grandfathering could apply to qualify for Centrelink benefits or Seniors Health Care Card. Also, you may like to take into consideration whether the pension is reversionary or non-reversionary or the impact of any binding death benefit nominations.
Just a couple of things to think about for your super and SMSF this financial year.