06 Nov Contribution strategies for Self Managed Super Funds
Up until a few years ago, Self Managed Superannuation Funds (SMSFs) were structured in a way where an individual could contribute unlimited amounts of money to their funds; albeit with potential tax issues to the end benefits. Today, contributions to SMSFs are restricted, although tax implications to end benefits for individuals over 60 have been lifted.
If you meet the Governments’ eligibility criteria for SMSF contributions, there are various strategies available to make the most out of your fund. Here, we will explain some of the basic strategies available:
Maximising Concessional Contributions
Every year, the Government sets limits for contributions to SMSF’s for various age brackets.
For 2012, if you are under 50 years of age, the annual contribution limit is $25,000. If you are already 50, or turn 50 between now and 30th June 2012, your annual contribution limit is $50,000.
If you breach these limits, you will be liable for excess contributions tax of 31.5% in addition to the standard 15% contributions tax.
Salary sacrificing is where you agree with your employer to give up part of your pre-tax salary in return for that money being paid directly into your SMSF. The effect of this strategy is the amount of salary you have “sacrificed” is taxed at a maximum tax rate of 15%, Instead of your marginal tax rate if that money was paid as salary (i.e. up to 46.5%). Remember, this is only beneficial if your marginal tax rate is a greater than 15%.
Personal Deductible Contributions
If you are not employed, or are self-employed (i.e. 10% or less of your assessable income and reportable fringe benefits come from employment activities), you can make tax deductible contributions to your SMSF. The benefit of this strategy is similar to salary sacrificing, in that you subsequently pay lower tax with this strategy on your income, if your marginal tax rate is greater than 15%.
For either salary sacrifice or personal deductible contributions, it’s imperative you take into account the amount of money your employer is contributing to your SMSF via guaranteed contributions, as this counts towards your annual limit.
Maximising Non-Concessional Contributions
The limit for non-concessional contributions is $150,000 per annum. If you are under 65 years of age, you can elect to bring forward the next two years of contributions, which is counted as $450,000 over the three year period.
Timing the ’Bring Forward’ Rule Approaching 65
If you have a substantial amount of money you would like to contribute to your SMSF, a key strategy would be to create a timeline of contributions where you use the ‘bring forward’ provisions to contribute up to $450,000 to your SMSF just before your 65th birthday, and work backwards to maximise your contribution limits.
The Government will match your personal superannuation contribution to your SMSF with a co-contribution up to certain limits. You can get a maximum co-contribution amount of $1,000 if you are earning $31,920 or less per year. Therefore, for every $1 of personal contributions you make, the Government will match a $1 contribution, up to a maximum of $1,000. If your earnings are between $31,920 and $61,920 per annum, the Government contribution is reduced by 3.3cents for every dollar in assessable income over $31,920, before it cuts out at $61,920.
Contributions From the Disposal of Small Business Assets
If you make a contribution to your SMSF with proceeds from the disposal income of certain small business assets, these contributions may be eligible to be excluded from your non-concessional contributions cap. For eligibility in this regard, please ensure you first check with your Taxation Accountant.
Ensuring you comply with Government regulations when it comes to making contributions to your SMSF is essential, not only to maximise your retirement fund but also to ensure you avoid any potential tax implications or penalties.