SMSF Contribution Caps

Understanding the Maximum Contribution Cap on a SMSF

SMSF Contribution CapsGone are the good old days when we could put millions into super.  Tax deductions were allowed on employer contributions from 1915 making it more attractive for an employer to make contributions on behalf of their employees. Interestingly, no taxes were paid in relation to superannuation contributions or earnings until the late 1970s.  Historically, limits have been imposed on the amount of concessional contributions an employer can make using the tax legislation as a means to make it uneconomical to exceed the limit for the employer and the employee.  The limits were much more generous historically. Until the simple super reforms in 2007 there was no limit on the non-concessional contributions that could be made. If you happened to possess millions of dollars, you could have contributed them to a super fund and only been taxed at 15% or less on the earnings. This tax advantage was highly appealing.

The SIS Act and Regulations govern the max concessional super contributions, the quantum of SMSF non concessional contributions, the overall SMSF contribution caps and the method by which such payments can be made. The super rules also govern the rules around the age of a member and when it can be accepted by the SMSF. Whereas the overall tax legislation governs superannuation contributions that can be made by your employer or personal super contributions by limiting the amount you can contribute to your SMSF and imposing other restrictions such as regulating when super payments you claim as a tax deduction in your personal tax return that can be made. 

Understanding Concessional (Before Tax) Contribution Caps in SMSFs

The concessional cap for the year ended 30 June 2024 is $27,500.

The cap can be increased in the current year if you are eligible to utilise the carry forward unused contribution rule (refer below).

Concessional contributions are payments made to a super fund typically from an employer or a member, who are in turn able to claim a tax deduction.  These types of contributions are known as before-tax contributions, concessional or deductible contributions.  Employer contributions can include super guarantee contributions and salary sacrifice contributions. The Income Tax Act imposes limits on the amount of concessional contributions made to a SMSF which are allocated in a financial year which usually ends on 30 June.

Tip – The concessional contributions cap limit apply to ALL of the super funds you contribute to.  Caution should be taken with life insurance premiums that can be paid directly to a dedicated retail fund which is set up to specifically pay for insurance premiums using concessional contributions.  It may seem like you are paying the premium directly, but in reality, you or your employer are receiving a tax deduction for the super contribution made, and the super fund is receiving a tax deduction for the life insurance premium, resulting in no overall tax obligation.  However, the contribution counts towards your concessional contribution cap.

Navigating Non-Concessional (After Tax) Contribution Cap 

The Non-concessional contribution Cap is limited to $110,000  for the year ended 30 June 2024.

Non-concessional contributions are contributions made to a super fund, often referred to as after-tax contributions, which are typically made by a member for their own benefit.  No tax deduction is claimable, and no contributions tax applies when it is contributed to a super fund.

In addition to other requirements, in order to be eligible to make non-concessional contributions, the member’s total super balance (refer below) must not surpass $1.9 million, which is the General Transfer Balance Cap (GTBC) applicable for the year ended 30 June 2024. Similar to the tip above the non-concessional cap limit apply to All of the super funds you contribute to.

There are certain types of contributions paid to a SMSF which do not attract a tax deduction but are excluded from the non-concessional  contribution cap and include:

  • Downsizer contributions
  • CGT small business contributions (up to the CGT lifetime cap amount of $1,650,000 up to 30 June 2024)
  • Personal injury contributions
  • Government co-contributions
  • Covid 19 recontributions

Total Superannuation Balance (TSB) – is measured at the 30 June immediately prior to the current financial year and includes (not limited to) all member super balances in all super funds for accumulation and pension balances as well as a proportion of certain outstanding loan balances in relation to limited recourse borrowing arrangements. 

General Transfer Balance Cap (GTBC) – is the general threshold for the amount of superannuation balances that a member can have in pension mode. The GTBC is $1. 9 million as at 1 July 2023.

Refer to the Australian Taxation Office website for further details on the contributions above.

Maximising Concessional (Before Tax) Contributions using the Carry Forward Rule

The carry forward provision serves as a way for individuals with low superannuation balances to catch up for missed contributions and boost their savings. This can be especially advantageous for women re-entering the workforce after caring for children, as they may have the opportunity to increase their retirement benefits.

Utilising Unused Concessional Cap (Before Tax)

Unused concessional contribution caps from prior years may be utilised in the current financial year.

In order to access the carry forward rule your TSB must be less than $500,000. 

Additionally, only 5 previous years of the unused cap can be carried forward. The carry forward rule starts from the 2018/19 financial year onwards. Concessional contributions made in a financial year are first counted towards the current year concessional cap and then it may be possible to increase the cap where a member has unused concessional cap from prior years. Any unused concessional contributions are lost after 5 years.  In order of priority the unused contributions first recorded are the ones which are first utilised or lost if older than 5 years.  

You must keep track of all of your concessional contributions made to all funds as well as when they are allocated.  Counting of contributions occurs when the contribution is allocated to a member of the SMSF. Most contributions are allocated when actually received by the fund. However, it may be possible to allocate a concessional contribution received in June to the next financial year.  Very helpful strategy when wanting a higher tax deduction in the current year but the contribution is not allocated or counted towards the member’s concessional cap until the following year.

Please ensure you contact your SMSF Accountant or Licensed Financial Adviser for advice before using a contribution strategy to avoid any legal or compliance issues.

Strategy to Make the Most of Your Unused Concessional Contribution Cap (Catch Up Contributions)

Check your eligibility to utilise the carry forward provisions and then access your contribution history using myGov account to establish what your catch up contributions are.

  • Prepare a contribution strategy to determine how much of the unused concessional contributions can be used and consider your financial and personal tax situation.
  • Determine how to make additional contributions and how much to make. Should they be member concessional contributions or, if available, salary sacrifice employer super contributions?
  • Review your member super balance at least annually and adjust how much you contribute based on the growth you require to accumulate wealth for your retirement and to maximise your tax benefit.

Contact your SMSF Accountant or Licensed Financial Adviser who can assist you with a strategy to utilise your catch up contributions.

Using Non-Concessional (After Tax) Bring Forward Rule 

During the current financial year, you have the option to utilise the bring-forward rule for up to 3 years of the annual non-concessional contribution limit, which is $110,000 for the 2024 financial year. This allows you to potentially contribute $330,000 as a non-concessional contribution in the current 2024 financial year, assuming that you have not activated the rule in the past 2 years, are under 75 years old, and had a Total Superannuation Balance (TSB) of less than $1.68 million as of June 30, 2023. If your TSB exceeds $1.9 million, you are not eligible to make any non-concessional contributions in the current year.

Tip – In order to bring forward $330,000 over a period of 3 years, the Total Superannuation Balance (TSB) must be below $1.68 million as of 30 June 2023. If the intention is to bring forward $220,000 over 2 years, the TSB cannot exceed $1.79 million. To make use of the standard non-concessional cap of $110,000, the TSB must be less than $1.9 million. If the individual does not fully utilise the entire bring forward contribution amount, the remaining balance can be contributed over the following 2 years (assuming they met the criteria to contribute $330,000). However, eligibility to contribute the remaining balance is not automatic and the individual must meet the eligibility requirements.

Example – Fred has a TSB of $1. 92million at 30 June 2023 and is under 75 in the 2024 financial year.  He made a non-concessional contribution of $160,000 in the 2023 financial year triggering the bring forward rule.  He can bring forward a further $170,000 over the next 2 years.  However, he is ineligible to make the contributions in the 2024 financial year as his TSB is over the threshold of $1.9million at 30 June 2023.  If his TSB drops to below $1.9million (assuming no changes to the threshold) as at 30 June 2024 and he is still under 75 he is able to make the additional non-concessional contribution of $170,000 in the 2025 financial year. 

Tax Implications if You Exceed Your Concessional Contributions Cap (Before Tax) or  Non-Concessional Cap (After Tax)

The excess concessional contribution (ECC) is transferred back to the member who is then taxed personally.  The member is taxed on the deemed earnings in relation to excess non-concessional contributions (ENCC).

What Happens if I Exceed My Concessional Contributions Cap (Before Tax)

Transferring the ECC back to the member reverse the effect of a member inappropriately adding to their superannuation balance on a tax preferred basis. 

  • There is no requirement to release the excess contributions from your Fund. However, why wouldn’t you as additional tax and penalties may be payable if it is not released or not released properly and in the allowable time frames.
  • The ATO will send you an amended tax return and a notice of determination where you can choose to leave the excess in your Fund or release the excess from your Fund.  You can contest the determination at this point if you believe the information is incorrect. The amount that can be released is 85% of the ECC as the 15% tax is rebated back to you. 
  • Your personal tax return is automatically amended to reflect the ECC allowing for a 15% tax rebate.  The amendment is done regardless if you elect to leave the excess in the fund or release it. You are taxed at your top marginal tax rate.
  • You only have 60 days from the date of the determination to make the election to have the excess released from your fund. 
  • The election can be made through your tax agent or using the ATO online services.
  • The election cannot be revoked or withdrawn.
  • The ATO will send your Fund a release authority which can, generally, be generated electronically using the tax agent’s superannuation software. 
  • The payment must be made directly to the ATO within 10 business days of receiving the release authority.
  • The ATO will refund any remaining balance to you after allowing for any outstanding tax debt or other Australian Government debts.

 

Tip – The election must be made, and the release authority received before the payment is made from your Fund to the ATO.  Otherwise, the payment from the Fund breaches the early access rules and the auditor may have to report the breach to the ATO.

Tip – If the member does not release the ECC (less 15% tax) it will also count towards the non-concessional cap.  If the non-concessional cap is not exceeded there are no issues. The ECC may push the non-concessional cap into excess.  Examples of the unintended affect can happen when your TSB is already in excess of the $1.9million threshold or if you have already triggered the bring forward rule and already made the total allowable non-concessional contribution. 

What Happens If I Exceed my Non-Concessional Cap (After Tax)? 

The ENCC can be transferred back to the member but an additional charge is applied which is taxable in the member’s personal tax return. There is no tax applicable to the return of the ENCC but may be used by the ATO to pay any outstanding tax debts. Alternatively, you can elect not to release the ENCC but leave it in the Fund and pay tax at 47%.

  • The ATO will send a determination to you explaining your options. This can be contested.
  • You only have 60 days from the date of the determination to make the election to have 100% of your ENCC and 85% of the associated earnings released from your Fund. 
  • The election can be made through your tax agent or using the ATO online services.
  • The election cannot be revoked or withdrawn.

Electing to Release the ENCC from the Fund

  • The ATO will send your Fund a release authority which can, generally, be generated electronically using the tax agent’s superannuation software. 
  • The payment must be made directly to the ATO within 10 business days of receiving the release authority and the ATO will issue an amended tax return in relation to the associated earnings after allowing for a 15% tax rebate.
  • The ATO will refund any remaining balance to you after allowing for any outstanding tax debt or other Australian Government debts.

Electing not to Release the ENCC from the Fund

  1. The ATO will send your Fund an ENCC tax assessment.
  2. Tax will be assessed at the individual’s highest marginal tax rate plus medicare which is 47% at 30 June 2024.
  3. Your Fund will be sent a release authority to pay the ENCC tax liability (47% tax on the ENCC) to the ATO within 10 business days.

Not making an Election within 60 days

  • The ATO automatically make the election to release the ENCC from your Fund if the election request is ignored or not received within the 60 day limit.

Calculating How Much You Can Contribute to Your SMSF

This appears very simple but there are some tricky issues to deal with to ensue you get this right.

Some items you need to check to calculate how much you can contribute before 30 June include:

  • How much super has been made to your SMSF and any other funds to date? Has your employer actually paid your super to your SMSF? Super contributions are not allocated and counted towards your cap until actually received by the Fund.  Employers often record the SGC payments in their employees’ payslips but not actually pay it to the Fund until a later date.  Particularly important at the beginning and end of a financial year.
  • Do you make contributions to another super fund which is dedicated to holding insurance specifically?
  • Did you make contributions in June to any superannuation fund in the prior year but allocated and counted towards your caps in the current financial year?
  • Did you pay for any Fund expenses during the year without being reimbursed as the expense may be classified as a contribution?
  • Were any in-specie contributions made such as transferring listed shares from yourself to the SMSF?
  • Ensure any contributions made at or near 30 June by electronic transfer or via a clearing house are made with sufficient time to be presented in the Fund’s bank account before 30 June.  If the contribution was made but does not hit the Fund’s bank account until say 2nd July it will not be counted as a contribution in the current year but will be allocated and count towards your cap in the following year.
  • A contribution made by cheque is counted in the year it is received by the Trustee and not when it is deposited.  Of course, if dated and given to the trustee before the 30 June, it must be deposited within a few days or it may be disregarded as a contribution in the current financial year.
  • A contribution received in June in the current year can be allocated as a contribution in the next financial year provided the trustee has allocated it to a contribution reserve and not to a member balance. An eligible contribution is counted in the member’s contribution cap in the following year.

 Making Contributions Without Exceeding Your Caps

How can you ensure you do not exceed your caps? Be aware of the following:

  • When your contributions counts towards your caps (refer above).
  • Contributions which do not count towards your caps (Refer to “Navigating Non-Concessional (After Tax) Contribution Cap”)
  • Check myGov which collects data from various superannuation funds to help calculate how much you have contributed to super. This is only a guide as it may not be updated and SMSFs do not usually report contributions until 15 May after the year in which the contribution was made.
  • Member concessional contributions (before tax) are subject to specific notifications before a deductible superannuation contribution can be claimed in your personal tax return.  If the notifications fail compliance standards the contribution will be counted as a non-concessional (after tax) contribution which can significantly impact your caps.
  • Downsizer Contributions have specific rules and if you fail to comply the contribution may not be exempt and could seriously impact your caps.                                                               

Planning Your Superannuation Contributions for Optimal Benefits

It is important to sit down with your SMSF Accountant or Licensed Financial Adviser to ensure you are optimising your superannuation contributions to maximise your wealth for your retirement and personal circumstances.

Understanding tax benefits associated with super contributions

Superannuation concessional contributions are concessionally taxed at 15%.  Low tax regime in the superannuation environment is used to encourage people to fund their own retirement to relieve pressure on the public purse. In the hands of the contributor the tax benefit is usually much higher than the 15% contributions tax.  The highest individual marginal rate is 47% which means a potential tax saving on a $27,500 contribution is $8,800 which is a significant saving.   

Timing contributions for maximum growth and tax efficiency

Timing of contributions can be critical to maximise wealth in your Fund.  For example if you are one of the people who are eligible to make use of the “catch up contributions” because your TSB is less than $500,000 and you have carry forward unused concessional contributions you could make a member concessional contribution which could potentially wipe out or substantially reduce your personal tax bill. Meanwhile putting more money into super is helping to maximise your wealth for your retirement.

Reviewing contribution strategies annually for adjustments

Annually review your financial goals to ensure your superannuation strategy is sufficiently robust to achieve your objectives. As members age and personal circumstances change adjustments should be made accordingly.  For example, Martha inherited $1million and may have the opportunity to utilise the carry forward unusual concessional contributions and may be eligible to utilise the bring forward rule to put more money into super and plan for her retirement.

Summary

The key takeaways are as follows:

  • Plan how much and when contributions should be made
  • Review timing of contributions and when they are allocated
  • Optimise your retirement wealth by using tax effective contributions 
  • Know your caps
  • Do not exceed your caps
  • Utilise your “catch up contributions”
  • Utilise the bring forward rule
  • Review your contribution strategies and amend with changes to personal circumstances

 

Do you want to learn more about SMSF and Contribution Caps?

Give us a call on 1300 392 544 or get in touch online.

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If you’re interested in learning more about SMSF and Contribution Caps? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you want to learn more about SMSF and Contribution Caps?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about SMSF Contribution Caps? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

Name(Required)