You can contribute non-concessional (after tax) up to the contribution cap in one year without paying any additional tax to your super fund. If you contribute more, excess contributions are subject to 46.5% tax.
In the May 09 Federal Budget the non-concessional cap for the year 2009/10 is set to $150,000.
Click here to read ATO website.
If you're aged 65 or over, you must satisfy a work test (40 hours in a 30 day period) before you can contribute to your super fund. You cannot make super contributions after age 74. If you're under the age of 65, you don't have to work to contribute.
On receiving non-concessional contributions, no tax is paid by the superannuation fund as the money is coming from your after tax income, sometimes this contribution is also known as "Undeducted Contributions" as no one has claimed a tax deduction for these contributions.
However, any income on these contributions is subject to tax @ 15% to be paid by the fund. Hence, if you have assets outside of super and paying tax on other income at a higher rate (above $35,000 tax rate is 30% in 2009 /10 year) then it is better (cheaper as you pay less tax) to hold all income earning assets within super.
Note no tax is paid on income of the fund, when superannuation assets are paying a pension to the member. Hence if you are paying tax on income earning assets which are outside super and are pensionable age (over 55 years old and over) all your assets should be in Super and paying you a pension even if you are working.
When a super fund pays you a pension from your account, whilst you are working, this account based pension is called transition to retirement income pension (TRIP). You can buy pension documents from us by
clicking here.
Who should own assets: SMSF or You
If you want to pay no tax on your income earning assets, the game is to transfer these assets to your Self Managed Super Fund and commence a pension on your 55th Birthday (those born after 1960 will have later preservation age). Care should be taken at the time of transferring these assets as strict rules apply on what your SMSF can buy from you and you must also consider capital gain tax & stamp duty issues.
Broadly your SMSF can buy a Business Real Property (with or without borrowing) and listed shares and managed funds from you. You can also lease Business Real Property owned by your super fund as it will be exempted from In-house asset rule. The ATO has released a new ruling on In-house Assets SMSFR 2009/4
click here to read from ATO website.
If you have a loan on assets to be sold to your super fund, then SMSF can also borrow and retire your debt. When SMSF borrows, the asset is held by a (bare) trust and is purchased under exemptions granted under Section 67 (4A) of
SISA.
If you have equity in your own home, you can withdraw (borrow) from your home loan and on-lend to your super fund. This means that non-contributions caps can be extended by lending to your SMSF, if required. For any purchase by your SMSF, if there is not enough equity in your home loan to borrow the full amount and on lend to your SMSF, then your SMSF can borrow from you and from an external lender, like a bank, to complete the purchase.
If your SMSF borrows to purchase a new asset, the trustee of the SMSF and the bare trust must be a corporate trustee company. To set up a special purpose trustee company for your SMSF and bare trust trustee company for $470
click here.
If you are retired and your income is below $6000 it does not matter if your assets are outside or inside super as you pay no tax, in any case; this "tax free" income outside super can be higher due to low income offset and if you are over 65 years old, due to Senior Australian Tax Offset.
If you are under 65 years of age at any time (you must be 64 on 1st July of the year), instead of the yearly cap of $150,000 you have the option of contributing up to $450,000 over a three-year period (the 'bring forward option') but certain conditions apply. First, the bring forward option has to be triggered; this will automatically happen when your contributions exceed $150,000 in any particular year.
Once this happens, you can spread out your remaining contributions, as long as they don't exceed $450,000 over the three-year period that start in the year the bring forward option was triggered.
If you contribute more than $450,000 in a three year period, you will pay excess contribution tax. The excess contribution tax of 46.5% and is imposed on the individual member who may request the trustee of the SMSF to pay it on its behalf.
The 'bring forward' rule is not available to members over the age of 65 years.
If you do not contribute in one year you lose the opportunity to contribute and once the bring forward rules trigger off, they do not stop, for example, if you contribute $300,000 in one year and nothing in the second year, in the third year you can contribute only $150,000. This means SMSF auditors should have running notes wherever non-concessional contributions in any one year have exceeded $150,000.
These caps are per individual member and cannot be shared with the spouse, further; any non-concessional contributions cannot be split with your spouse. Only concessional (deductible) contributions can be split.
If you're taxable income is low for any reason or either because you are over 60 or work part time, the only reason why you should be making non-concessional contributions to your fund is because you want to benefit from Government co-contribution scheme.
Maximum Benefit of non-concssional contributions
To gain maximum benefit of non-concessional contribution & co-contribution, you must do the following:
- Contribute $1000 for each member, including kids (or grandkids) who are 15 years and 9 months and who are members of your SMSF, which means children (or grandchildren) should also join as members of the fund.
- Members who are over 65 years (but below 75 years) must pass the work test before contributing and must be "gainfully employed".
Gainful employment includes employment or self employment for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. Income can be via salary or wages, business income, bonuses, commissions, fees or gratuities, in return for personal exertion.
Examples of income earning activities are; dog walking, security personal, newspaper delivery, babysitting, house cleaning, lawn mowing, gardening, trading (buying and selling goods at profit), consulting and any paid employment work.
The HK Strategy
As mentioned above, if your income is low, there is no reason for you to contribute non-concessional to a SMSF or invest the money via super fund structure instead of outside super, as in both cases, inside and outside super, income is taxed @ 15%, unless you want to benefit from co-contribution scheme.
Full co-contribution is paid to those whose adjusted incomes are low and tapers off once adjusted income increases over about $30K and is not paid once your adjusted income reaches about $60K. From 1st July 2009, any salary sacrifice is included in your adjusted income.
This means, potentially two groups of people are most likely to get co-contribution, firstly those who are older (semi retired) and work part time and have the money to contribute to super and younger people who are studying and working part time and their contributions are sponsored by their working rich parents.
It is very unlikely someone who is earning $30,000 who is 30 years old will have the spare $1,000 to contribute to super which he will see only when he is 60 years old!
In 2009 /10 the government will contribute up to $1,000 of tax-free super money into your super fund when you make a $1,000 after-tax contribution.
The HK strategy: When transferring all your income earning assets in super, instead of making a one-off non-concessional contribution of $450,000 (for each member) in one year and nil for the next two years, advisors should only recommend contributing $448,000 and not the full $450,000 in one year, as in the next two years members can contribute additional $1,000 to make up to the full $450,000 for a three year period.
This way the members will be eligible for co-contribution for all the three years instead of only one year assuming the income of the member is low enough to get the co-contributions in all the relevant three years.
If by mistake, any member has already contributed $450,000 in year one, you have two options:
Option 1: In year two & three, to get the $1000 government co-contribution, the member will to pay $465 (over two years the loss will be $830 for each member) excess contribution tax on the $1,000 non-concessional contribution and the net gain will only be $535 co-contribution each year instead of the full $1,000.
Option 2: Some accountants / trustees may prefer to lodge an amendment for previous years income tax return and re-clasify $2,000 to be shown as concessional contribution instead of non-concessional contribution and get away by paying $300 tax on contributions @ 15%, some interest may also be applied.
Let us understand how the strategy works with an example
- If a member contributes $450,000 non-concessional contribution in year one:If you make a $450,000 non-concessional (after-tax) contribution to your super fund during the 2008/09, you are bringing forward next two years contributions. Which means you cannot make non-concessional contributions in 2009/10 or 2010/11 unless you pay 46.5% excess contribution tax.
- If a member contributes $448,000 non-concessional contribution in year one: If you make a $448,000 after-tax contribution during the 2008/09, that will trigger off the bring forward rules for the next two years, that means that you can make $1,000 non-concessional contribution in the year 2009/10 and another $1,000 in 2010 /11 year without paying any excess contribution tax, whilst your super fund receives full $1,000 (per member) government co-contribution.
How did HK plan for his retirement?
