A guide to the Federal Budget changes to SMSF contributions

One of the headline announcements in the 2012-13 Federal Budget affecting SMSFs was regarding contribution caps. Dan Butler and Nathan Papson explore this announcement, as well as other recent updates that could affect SMSF contributions leading up to 30 June 2012.

Federal Budget announcement

Leading up to the Budget, it had been announced by Minister for Financial Services and Superannuation Bill Shorten that there was going to be an uplift in the concessional contributions cap for people aged 50 or over, with superannuation balances less than $500,000, moving forward. 

In the Budget itself, this proposal was essentially deferred. The Budget stated that from the income year ending 30 June 2015, individuals aged 50 and over with superannuation balances less than $500,000 would be entitled to an additional $25,000 of concessional contributions per year. 

Summary of CCs cap for future years 

The Budget announcement brings some news for 'over 50s' in coming years. However, it may cause self-managed superannuation fund (SMSF) trustees and financial advisers to overlook some of the immediate changes to concessional contributions caps. 

Section 292-20 of the Income Tax (Transitional Provisions) Act 1997 (Cth) outlines the transitional provisions that allow for a concessional contributions cap of $50,000. SMSF members aged 50 and over have a concessional contributions cap of $50,000 for the income year ending 30 June 2012.

However, this transitional provision ceases to have effect after 30 June 2012. As such, the concessional contributions cap for all individuals will be $25,000 in future years until the proposed Budget change takes effect. Naturally, this should be considered by advisers and SMSF trustees when planning future contribution strategies.

Below is a summary of the concessional contributions cap, assuming that the Federal Budget measures are implemented as planned.

This summary assumes that the trustee is empowered to accept the contributions in line with the restrictions in reg 7.04 of the Superannuation Industry (Supervision) Regulations 1994 (Cth), such as someone who is aged over 65 years must satisfy the 'gainfully employed' test.

Note that the Budget has suggested that the concessional contributions cap for the year ending 30 June 2015 was set to rise to $30,000 due to indexation. Individuals 50 years and over will have a concessional contributions cap of $55,000, assuming that they are below the super fund assets threshold of $500,000 - this is in line with the Budget's proposal.

Additional contribution incentive for year ending 30 June 2012

In addition to the Budget, there is another recent publication that may affect how SMSF trustees and advisers treat contributions at year end.

In ATO ID 2012/16, the Australian Taxation Office (ATO) confirmed that an SMSF trustee can allocate a contribution made pre 1 July 2011 to the next financial year.

Broadly, this strategy can be used if a contribution is made to a contributions reserve in one income year and then later allocated to the member's account for the next.

For example, if an SMSF member were to make two $25,000 contributions in June 2011, one could be allocated to the year ending 30 June 2011 and the other could be allocated to the year ending 30 June 2012 (via allocating to a contributions reserve and subsequent allocation to the member's account).

We note that the strategy could not apply to concessional contributions made by employers under Superannuation Guarantee (SG) legislation.

Broadly, SG payments must be fully vested in a member's account. They are not able to be made to a contributions reserve in the relevant period.

The ATO also confirmed that the member could also claim a deduction for the full $50,000 on their personal income tax return for the year ending 30 June 2011.

There are a number of qualifiers that must be met before members can utilise this strategy. One aspect is that the SMSF's deed must not prohibit contribution reserves.  As such, the deed should be reviewed, and updated if necessary, before proceeding with this strategy.

Finally, we note the potential advantages of using this strategy. Firstly, the strategy may help individuals manage excess contributions.

We also note the further Federal Budget announcement that from 1 July 2012, individuals with an income greater than $300,000 will have their concessional contributions effectively taxed at 30 per cent.

As the concept of income for this announcement includes concessional contributions, it highlights the importance of being able to allocate them in certain income years.

To date, there is no detail on whether a contribution made prior to 1 July 2012 (under the strategy in ATO ID 2012/16) will be counted.

Year end considerations

The Budget announcement regarding concessional contributions caps shifts the focus of the upcoming changes. SMSF members, trustees and financial advisers should consider these changes carefully when formulating contribution strategies and seek advice if uncertain. 

Further, the strategy in ATO ID 2012/16 can be utilised to strengthen the tax position of the member in certain circumstances. It also allows for further scope when planning contributions. An SMSF's trust deed is an important tool that will allow for this contribution strategy to happen.

Thorough planning is also advised as 30 June approaches. Exceeding contributions caps may cause a highly disproportionate rate of excess contributions tax.

Daniel Butler is the director and Nathan Papson is a lawyer at DBA Lawyers.