With the end of another financial year only a few weeks away, it’s timely to have everything ready to ensure your SMSF’s 2021/22 financials and tax return can be completed without fuss. If you’ve had an SMSF for many years you would be familiar with what’s required. As super changes continually there may be some new rules to understand and other things you need to pay more attention to, such as the indexed contribution and cap thresholds.
When it comes to contributions you should plan to maximise the amount you can afford, but remember you’ll need to stay within your concessional or non-concessional contribution caps to avoid any tax penalties.
For tax deductible concessional contributions, there is a universal standard cap of $27,500 that applies if you qualify. But if your total super balance on 30 June 2021 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 as a tax deduction since 1 July 2018.
Time frames are always important if you wish to claim a tax deduction for personal concessional contributions. Make sure your election to claim the tax deduction is lodged with your SMSF in time and includes the amount you intend to claim. You must make the election before your personal tax return is sent to the ATO for the 2021/22 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 Remember there’s a bit of a twist as the election needs to be with the fund before any part of the contribution is withdrawn or used to start a pension.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 $1.7 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 $1.7 million and you qualify to make NCCs to your SMSF, you may be able to contribute up to $110,000. However, if you are under 67 years of age you may be able to access the bring forward rule which allows you to make NCCs of up to $330,000 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 $110,000. If your TSB is less than $1.48 million in this financial year you can bring forward up to $330,000 over a fixed three year period, and if your TSB is between $1.48 million and $1.59 million it is possible to bring forward up to $220,000 over a fixed two year period. If your TSB is between $1.59 million and $1.7 million then you are only able to make the standard NCC of $110,000 and if your TSB is at least $1.7 million you can’t make non-concessional contributions without a tax penalty applying.
If you have triggered the bring forward rule in either the 2019/20 or 2020/21 your total NCCs may be either $330,000 or $220,000 respectively provided you have not exceeded your Total Super Balance as at 30 June 2021. If in doubt seek advice on the amount of NCCs you can make for this financial year as the rules can be confusing.
Changes to contributions from 1 July 2022 – strategy and seeking advice
For anyone between 67 and 75 years of age the work test will not apply when making non-concessional contributions from 1 July 2022. Under the current rules which apply to 30 June 2022 anyone who is older than 67 and wishes to make personal superannuation contributions must meet the work test of 40 hours in 30 consecutive days in the financial year in which the contributions are made.
The work test will still apply for personal concessional contributions made by anyone who is between 67 and 75 years and the usual election will need to be given to the fund trustee.
When paying a pension from an SMSF you will need to make sure that 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 means that 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 if the amount is paid as a pension there will be no reduction in your Transfer Balance Account. However, if you decide to commute (convert) the amount in excess of your minimum pension payment to a lump sum, it will result in a reduction of your Transfer Balance Account and can be used to access additional pension benefits in future if you need to.
If you decide to commute your pension above the minimum you need to tell 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 and changes that will take place from 1 July 2022.