So How do Concessional Contributions work in an SMSF?
One of the main benefits of having a self-managed superannuation fund is you have better investment choices and flexibility than a traditional super fund. Having greater control, however, means that you are in charge of making decisions for the fund and are responsible for complying with super and tax laws.
A high-risk area for many SMSF trustees is accepting contributions to an SMSF. Having an understanding of how you can contribute cash and other assets to the fund is critical to keeping compliant. In this article, we’ll cover one of the two types of contributions you can make to your SMSF: Concessional Contributions.
What are concessional contributions?
Concessional contributions are contributions that are made into your super that are not yet taxed (which is why they are also called “before-tax contributions”). When concessional contributions are in your fund, they are generally taxed at a rate of 15%.
There are different types of concessional contributions, which include employer contributions, salary sacrifice contributions, and personal concessional contributions.
Employer contributions, such as super guarantee and salary sacrifice contributions, are the most common concessional contributions. Typically, these contributions are made at 10.5% of your salary income.
Personal concessional contributions are contributions to your SMSF that you voluntarily made where you claim a tax deduction for the said contribution in your personal tax return.
More About Personal Concessional Contributions
To maximise the contributions you can make to your SMSF and reduce your personal tax liability, you can opt to claim a tax deduction on any personal contributions within the concessional contribution cap.
Am I eligible to make a personal concessional contribution?
Most individuals who are under 75 years old can claim a tax deduction against their personal contributions to their SMSF. To be more specific, you are eligible to make a personal concessional contribution if:
- You are receiving employment income as an employee, you are eligible to make personal deductible contributions on top of the mandated employer contributions you receive;
- You are self-employed or receive passive income and you have enough income to offset the deduction.
Individuals aged 67 to 74 years old can claim a deduction for personal contributions so long as they satisfy the work test or work test exemption requirements. For more information about member contributions and the work test, visit the ATO website.
For members who are 75 years and above, they can only claim tax deductions for their personal contributions that were made prior to the 28th day of the month following the month when they turned 75 years old.
Individuals who are under 18 years old at the end of the financial year in which they made a contribution can only claim a deduction if they also received income as an employee or from running a business during the same financial year.
Notice of Intent to Claim a Deduction
An individual who meets the age requirement and wishes to claim a tax deduction on their contribution must furnish a notice of intention to claim a deduction to their SMSF. This document can be provided by the SMFS’s administrator or the member can write to the fund’s trustee/s detailing all relevant information. There’s also an option to download the “Notice of intent to claim or vary a deduction for personal contributions (NAT 71121)” form from the ATO.
For the notice to be valid, the following must be met:
- The notice must be provided while the individual is still a member of the fund and the SMSF still holds the contribution (e.g. it was not rolled over to another fund or paid out as a benefit);
- The notice must be provided before the day when the annual return of the SMSF is lodged for the year when the contributions were made, or during the end of the financial year following the financial year in which the contributions were made;
- And a written acknowledgement must be received before the tax deduction can be claimed in the member’s personal tax return.
Note that personal contributions are considered non-concessional until a member submits an intent to claim a deduction. Timing is critical to claim the full amount intended for the tax deduction as this can affect lump sum and pension commencements.
Concessional Contributions Cap
If you’re considering claiming tax deductions against personal contributions, note that these will count towards your concessional contributions cap.
The cap is currently set at $27,500 from 1 July 2021 and was at $25,000 from 1 July 2017 to June 2021. This cap is regardless of whether they are personal contributions or employer contributions
You may have a higher contribution cap if you did not use the full amount earlier as per the ATO’s carry-forward rules. Basically, if your contributions do not reach the concessional contributions cap within a financial year, you can carry the unused cap forward so you can contribute more than $27,500 the following year.
This carry-forward rule only applies to unused concessional contributions amounts starting July 2018. Also, the amounts to be carried forward have a five-year expiration, and you can only carry forward a concessional contributions cap if your super balance is below $500,000 at the end of the previous financial year.
You can view your concessional contributions cap information via myGov.
Considerations On Whether To Claim Deductions For Super Contributions
When you’re deciding if you’re going to claim a tax deduction on your personal contributions, make sure to consider the following:
- Although there is no limit on claiming a deduction for personal contributions, these contributions are subject to a cap as mentioned earlier. If you exceed the contribution cap, you will be subject to excess concessional contribution rules.
- If your personal income is greater than $250,000, you may be subject to an additional 15% tax on contributions as per the Division 293 tax rules.
- Tax deductions claimed for personal contributions are part of reportable super contributions, which can affect some tax offsets and some government benefits.
Need professional advice?
If you want to know more about receiving contributions in your SMSF or have other queries regarding your super fund, do not hesitate to reach out to our team and we’ll be more than happy to assist.