News 06/07

Super Concepts e-SuperUpdate provides you with technical tips and updates on Self Managed Superannuation Fund topics of interest.

On budget night this year, 9 May 2006, the Treasurer announced significant changes intended to simplify and streamline superannuation.  Most of these changes are proposed to commence from 1 July 2007.  However, some changes will be effective from 9 May 2006 if they become law.  At this stage no legislation has been passed and the following information is based on statements made by the government and Treasury.

The two changes which take effect from Budget night:

• Place a limit on the amount of undeducted contributions (non tax deductible personal contributions and spouse contributions) that can be made to superannuation; and

• Abolish the compulsory cashing of benefits when a person retires after age 65 or reaches age 75 if they continue to work.

In this edition of e-SuperUpdate we will look at the limit placed on undeducted contributions made from 9 May 2006 and how they will probably affect members of self-managed superannuation funds.

Undeducted Contributions

Until the Treasurer’s announcement on Budget night there was no limit to the amount of undeducted contributions a person could contribute to superannuation for themselves or their spouse. 

The main benefit of having no previous limit on the amount of undeducted contributions was that members of self-managed superannuation funds and other funds could contribute large amounts to superannuation usually just prior to retirement.  Large undeducted contributions were not necessarily confined to the period just before retirement.  Examples could include someone who wished to transfer:

• an injury compensation payment or an inheritance into superannuation with the aim of commencing an income stream in future; 

• publicly listed shares or business property to the fund for sound strategic reasons. 

Since Budget night these people will need to understand how the rules for undeducted contributions have changed.

Proposed Rules for Undeducted Contributions

The proposals in the Budget place a standard annual limit of $150,000 per person on the value of undeducted contributions that can be made to superannuation.  There is an exception to this rule which permits a person to contribute more than $150,000 annually provided no more than $450,000 is made within a three year period.  Any amount contributed in excess of the limit that applies will be refunded plus income thereon less tax on the income at the top personal income tax rate of 45%.

Let’s use Fred and Wilma, characters we have used in previous editions of   e-SuperUpdate, to illustrate how these proposals work*.
Fred is now 62 and Wilma is 59.  They both wish to make undeducted contributions to superannuation.  To start with let’s have a look at the operation of the proposals if Fred makes undeducted contributions to his self-managed superannuation fund over the years.

Fred’s Situation

In the 2006/07 financial year Fred makes an undeducted contribution of $150,000 which is the maximum permissible under the yearly cap.  During the 2007/08 Fred contributes $450,000.

In these circumstances the fund accepts the contributions, however in the 2008/09 and the 2009/10 financial years Fred is not to exceed $450,000 or any excess will be refunded to Fred.

In the 2010/11, 20011/12 and 2012/13 financial years Fred can contribute undeducted contributions which are counted against the $450,000 three year cap

During the 2012/13 financial year Fred decides to retire permanently when he is 68 and wishes to make the maximum undeducted contribution to superannuation.  Under the proposed rules Fred can only contribute up to $150,000.

To take advantage of the $450,000 cap, a person after reaching 65 is required to meet the work test of 40 hours in 30 consecutive days during the financial year. If Fred makes a contribution which is in excess, that amount plus interest will be refunded with interest and taxed at maximum personal rates.

Wilma’s Situation

During the 2006/07 financial year Wilma contributes $300,000 as an undeducted contribution.  As this is greater than the standard annual contribution limit of $150,000 it will trigger the $450,000 three year contribution cap.  The three year cap will apply for the 2006/07, 2007/08 and 2008/09 financial years.

Wilma does not make an undeducted contribution for the 2007/08 financial year.  In the 2008/09 financial year she makes a contribution of $200,000 which is subject to the three year cap.  As Wilma has made total undeducted contributions of $500,000 over the 2006/07, 2007/08 and 2008/09 financial years they will exceed the three year cap of $450,000 by $50,000.  

The fund will be required to refund the excess of $50,000 to Wilma plus any income earned on it.  If the fund has earned 10% on the excessive amount then the fund will also be required to pay $5000 less tax at the top personal tax rate of 45%.  This means the fund would be required to pay $52,750 to Wilma and $2250 tax to the Tax Office. 

The lessons to be learned from the change in making undeducted contributions to superannuation are:

• make sure you know the proposed rules for making undeducted contributions to superannuation from 9 May 2006;

• the standard contribution limit for undeducted contributions is $150,000;

• where the standard limit for undeducted contributions applies it is not possible to bring forward any shortfall in undeducted contributions from previous years;

• a three year contribution cap of $450,000 can apply for those that wish to make undeducted contributions of more than the standard limit in a financial year.  The three year cap applies from the first year in which undeducted contributions of more than $150,000 are made;

• the three year cap is only available where a person has an entitlement to make an undeducted contribution for each year during the three year period.  For anyone under 65 undeducted contributions can be made without any work tests being satisfied.  However, between 65 and 75 a person must have worked 40 hours in 30 consecutive days in each financial year in order to qualify for an undeducted contribution.

• any excess over the standard contribution limit or the three year cap will be refunded plus interest less tax on the interest at the top personal tax rate;

• a change to the rules which require a person 65 or older to commence taking their benefits from superannuation either as a lump sum, pension or a combination of both.

In the next edition of e-SuperUpdate we will look at the changes to the proposed abolition of the work tests from 9 May 2006