By Monica Rule

Self Managed Superannuation Fund (SMSF) members need to be aware of the importance of their total superannuation balance as, from 1 July 2017, it will impact on how much they can contribute, whether they qualify for certain superannuation entitlements, and which method their SMSF must use to determine tax exempt income.

A member’s total superannuation balance is calculated by adding together their accumulation account balance, retirement pension account balance, and any money rolled into their SMSF that has not been allocated to either their accumulation or retirement accounts, and then subtracting any structured settlement contributions (e.g. compensation payments for personal injury) received in their SMSF. 

Eligibility to make Non-Concessional Contributions

From 1 July 2017, a member’s total superannuation balance must be below the transfer balance cap (i.e. $1.6 million for 2017/2018) to be eligible to make non-concessional contributions into their SMSF.  The balance is measured at 30 June of the previous year in which the contribution is made and is tested each financial year.  This also means a member under the age of 65 will not be able to use any unused portion of their bring-forward non-concessional contributions cap if their total superannuation balance is $1.6 million or over.  

Another thing that SMSF members may not realise is that there are other contributions that may affect their ability to make non-concessional contributions into their SMSF. One is the “Capital Gains Tax Cap amount” and the other is the “Structured Settlement contribution”.  This is because the CGT cap amount counts towards a member’s total superannuation balance and the structured settlement contribution does not.

Capital Gains Tax Cap (CGT) amount 

There are two situations where an SMSF member may qualify to contribute money into their SMSF and have it treated as a CGT cap amount instead of a non-concessional contribution.  The first is under the “Small business 15 year CGT exemption”. This is where an SMSF member who is at least 55 years of age and qualifies as a small business taxpayer (i.e. they have a turnover of less than $2 million or a maximum net asset value not exceeding $6 million), sells an active business asset and then contributes the total proceeds from the sale of up to $1,445,000 (for 2017/2018) into their SMSF.  Now, in order to do this, they must have owned the asset for at least 15 years, and the reason they are selling the asset is because they are retiring or they have become permanently incapacitated.

The second situation is under the “Small business retirement CGT exemption” where an SMSF member who is under 55 years of age and qualifies as a small business taxpayer contributes capital gains from the sale of an active asset of up to $500,000 into their SMSF.

In both situations, in order for the contribution to be treated as a CGT cap amount, a member must make an election using the ATO form NAT 71161 at the time they make the contribution into their SMSF.  If the election is made after the money is contributed into their SMSF it will be treated as the member’s non-concessional contributions and may result in excess non-concessional contributions tax if the member exceeds their non-concessional contributions cap. Although the CGT cap amount is not counted towards the member’s non-concessional contributions cap, it is counted towards the member’s total superannuation balance. Therefore, if a member is considering contributing non-concessional contributions, as well as their CGT cap amount from 1 July 2017, they may wish to contribute their non-concessional contribution prior to contributing the CGT cap amount while their total superannuation balance is below the $1.6 million limit.

Structured Settlement Contributions

Payments arising from structured settlements or orders for personal injuries that are contributed into SMSFs can also be excluded from a member’s non-concessional contributions cap.  This is provided certain requirements under the Taxation Law are met, as well as two legally qualified medical practitioners certifying that, because of the injury, it is unlikely that the member can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training.

For the contribution not to be treated as a non-concessional contribution, the member must make an election using the ATO form NAT 71162 for the payment to be treated as a Structured Settlement contribution when the contribution is made into their SMSF.  The Structured Settlement contribution will not count towards the member’s total superannuation balance.  In addition, if the member decides to commence a retirement pension using the money from the Structured Settlement contribution, it will also be excluded from the $1.6 million transfer balance cap.

Spouse contribution tax offset

A spouse can claim a tax offset of up to $540 for making up to $3,000 in non-concessional contributions for their low income spouse.  This is provided the low income spouse’s total superannuation balance does not exceed $1.6 million (i.e. transfer balance cap) and their total non-concessional contributions received in the relevant financial year do not exceed the $100,000 annual limit. The low income spouse must also be under the age of 70 and meet the part time work test (i.e. 40 hours over 30 consecutive days) if aged 65 to 69, both the contributing spouse and the low income spouse must be Australian residents for income tax purposes and not be living separately and apart on a permanent basis at the time the contribution is made.  The income threshold for the low income spouse must not exceed $40,000 from 1 July 2017.

Catch-up concessional contributions
The new law allows any unused concessional contributions (the annual cap is $25,000) from 1 July 2018 to be carried forward for up to five consecutive years.  This is provided the member’s total superannuation balance is less than $500,000.  Only unused amounts accrued after 1 July 2018 will be eligible.  Amounts carried forward that have not been used after five years will expire. 

Superannuation co-contributions

From 1 July 2017, to be eligible for up to $500 of the Government’s superannuation co-contribution, a member’s total superannuation balance must be less than $1.6 million (i.e. transfer balance cap) on 30 June of the year before the relevant financial year.  The member must also not have contributed more than the $100,000 non-concessional contributions cap, their total income must be below the higher income threshold (i.e. $51,021 for 2016/2017), and 10% of their total income must be from employment related activities, carrying on a business or a combination of both.

Segregated assets method

From 1 July 2017, SMSFs will no longer be permitted to apply the segregated assets method to determine their tax exempt income if any member has more than a $1.6 million  superannuation balance and the member is in pension phase.

Having a good understanding of the new laws will enable members to understand what does and does not count towards their total superannuation balance, how their entitlements are affected, how they can avoid penalties, and take advantage of opportunities to accumulate more for their retirement savings.

For Gold and Platinum members, Monica has provided scenarios on how the sequence of making contributions into an SMSF can affect a member’s total superannuation balance.  

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.

Related Documents:

• Self Managed Superannuation Fund Deed
• SMSF - Deed Update
• Pension Pack for Self Managed Super
• Build a Company (ELodgement)

Related Webinars:

• Webinar Recording - Understanding the 2017 Superannuation Changes