From 1 July 2017 there are no more fund-capped contribution limits, will this mean more excess non-concessional contributions? There is now less regulatory onus on SMSF trustees to assess whether an individual contribution can be accepted. Some may not have known they had this obligation prior to 1 July 2017! What it does do is expose SMSF members to a greater likelihood of exceeding the non-concessional contribution cap. The cap is linked to the member’s total superannuation balance at the preceding 30 June.
There is a now standard non-concessional contribution cap of $100,000. More appropriately the non-concessional cap is four (4) times the concessional cap, currently $25,000. Accessing the cap is subject an individual’s total superannuation balance being lower than the general transfer balance cap, currently $1.6m. The bring-forward provisions is subject to further restrictions linked to how much space an individual has between their total superannuation balance and the general cap.
Thankfully the ability to utilise non-concessional contributions is not proportionate based on how much under $1.6m an individual has. An individual with $1,599,999 at 30 June can contribute $100,000 the following year subject to age and work tests.
Making concessional contributions may catch some clients out. If a member makes a personal contribution, and claims a tax deduction which is denied the amount will be considered a non-concessional contribution. If their balance is greater than $1.6m then they will have exceeded their cap. There are no restrictions on claiming a personal deduction meaning an individual could conceivably contribute more than $25,000 and claim a deduction. By doing so that individual exposes themselves to the excess contribution tax regime and its associated penalties.
Contributions that exceed the caps will bring a fund to the attention of the ATO, in particular excess non-concessional contributions. Excess non-concessional contributions will result in a release authority for the excess amount and 85% of the associated earnings. There is no requirement to release excess non-concessional contributions from the member’s tax free component. This results in an opportunity to skew the benefit towards releasing a greater proportion from the taxable component. As part of their Super Scheme Smart program the ATO will be targeting funds where a member deliberately exceeds their non-concessional cap to manipulate benefit components.
Given the ATO have indicated that 85% of SMSF members have less than $1m, the non-concessional contribution limits and the total superannuation balance rules are likely to be irrelevant for many funds for many years, but if you do find clients are approaching the general transfer balance cap be sure to put your education cap on and have a chat to your clients.