As another financial year comes to an end, it’s time to ensure that your Self-Managed Super Fund is compliant and end of financial year ready.
We’ve made SMSF EOFY administration as streamlined as possible by compiling a helpful checklist:
If your Self-Managed Super Fund is in accumulation phase, be sure to review the level of contributions you’ve made for the 2021 Financial Year.
Concessional contributions are those that are taxed concessionally at the rate of 15%. Currently, the contributions cap for each year is $25,000. This is called your general concessional contributions cap. Your cap may be higher if you have an unused concessional contribution cap balance (more on this later).
Concessional contributions may include:
- Superannuation Guarantee Contributions (typically from an employer)
- Additional contributions your employer makes before tax
- Salary Sacrifice payments
- Personal contributions you are claiming a deduction for
Top Tax Tip: Contributing extra money into your super as a concessional contribution can reduce your marginal tax rate and thus reduce your income tax liability.
For example, a self-employed person contributing $25,000 from their before-tax dollar can claim a tax deduction for the amount contributed while reducing their taxable income by the same amount. Consider a self-employed person earning more than $180,000; the marginal tax rate for income over $180,000 is 45%. By contributing $25,000 to super, they’ve reduced their income for tax purposes down to $155,000. This effectively drops their tax bracket down to 37%. The $25,000 contribution will be taxed inside super at the concessional rate of 15% rather than the marginal tax rate of 45%.
Non-concessional contributions are those that you have made with after-tax funds. Up until 30 June 2021, the non-concessional contribution cap is $100,000 per year.
Carry Forward and Bring Forward provisions
If you are under age 67, you’re able to carry forward any unused concessional contribution cap balances from years prior if you meet these two conditions:
- 1. Your total superannuation balance was less than $500,000 at 30 June of the previous year.
- 2. You have made concessional contributions that exceed your general concessional
contribution cap within the current financial year.
You can find your unused concessional contributions cap balance by logging into your MyGov account and using the Australian Taxation Office portal.
Likewise, you are able to bring forward your non-concessional cap for future years as follows:
Australian Taxation Office (07 June 2021)
Bear in mind that you will need to ensure you remain compliant with the Total Superannuation Balance limits when looking to take advantage of your contribution caps.
Suppose your spouse is under the preservation age or is not retired and also between the preservation age and 65. In that case, you can elect to split your contributions with them — meaning some of your employer contributions or non-concessional contributions will be transferred into their super fund.
Top Tax Tip: Contributions splitting can be used as part of your retirement strategy to allocate money to the fund with the lower amount. If the amounts can be reallocated across your SMSF and your spouse’s super fund to keep both balances less than $500,000, you will be able to use the ‘carry forward’ provision to maximise concessional contributions.
Minimum Pension Payments
Due to the impact of COVID-19 on financial markets, the Australian Government introduced a measure to assist in preserving the balance of your SMSF if it’s in pension phase, by lowering the minimum allocated pension payments by half. At the May Federal Budget, the Government announced it would be continuing to set the minimum allocated pension rates at the reduced 50% level until 30th June 2022. This has made it easy to meet the minimum pension payments for the 2021 financial year, but it pays to double-check you’ve met or will meet your minimum pension payments by June 30.
Your allocated pension product provider will be able to provide the exact minimum drawdown figure for the 2020-21 financial year. To obtain an indicative figure, find your relevant age bracket below, then calculate the percentage based on your account balance at 01 July 2020.
Australian Taxation Office (07 June 2021)
Meeting work test if still in accumulation phase
Suppose you are over the age of 67. In that case, you will need to satisfy the ATO’s Work Test (or be eligible for a work test exemption) before contributing to superannuation in the 2021 financial year. The work test stipulates that you must be gainfully employed for a minimum of 40 hours during a consecutive 30-day period in the 2021 financial year to make contributions.
Helpful hint: You may be eligible for the work test exemption! The work test exemption provides a one-year relief from the work test for those who have recently retired. You can only claim the exemption once, but it could be available to you if:
- You met the work test last financial year
- Your superannuation balance is less than $300,000 as at 30 June 2020
- You have not previously used the exemption
Take advantage of offsets
If they apply to you, then certain types of offsets can aid in building your super balance while minimising tax.
Suppose you’re a low to middle-income earner and have made non-concessional contributions totalling a minimum of $1,000 in the 2020-21 financial year. In that case, you may be eligible for the Government Co-Contribution. The co-contribution is effectively the Government adding an extra $500 to your superannuation balance as a thank-you for your efforts in boosting your superannuation balance. You will need to satisfy the ATO’s eligibility criteria, but this is a great way to effectively get bonus funds to help towards reaching your retirement goals.
Low Income Super Tax Offset
Similar to the Government co-contribution, the Low Income Super Tax Offset (LISTO) payment is designed to help low-income earners save for retirement. If your yearly income is less than $37,000 per year, you could be eligible to receive a LISTO payment. The maximum payment is $500, and the minimum is $10. Your payment amount (if eligible) is equivalent to 15% of the concessional contributions made into your superannuation fund. The best part is, you don’t need to do anything to receive it! You just need to make sure your superannuation fund has your Tax File Number and that you lodge an income tax return for the year.
Spouse Tax Offset
You can help grow your spouse’s superannuation balance and access up to an 18% tax offset through utilising the Spouse Tax Offset. Firstly, there are a few eligibility criteria to meet. Your spouse has to:
- Be under age 67, or
- Be between ages 67 – 69 and have met the work test / claimed work test exemption
- Have a yearly income of $40,000 or less
For the purpose of the Spouse Tax Offset, a spouse is considered someone who lives with you on a genuine domestic basis, such as a de-facto partner of any gender or your husband or wife. Notably, it does not include a person who is legally married to you but lives separately and apart from you on a permanent basis.
To receive the maximum offset of 18%, your spouse needs to have earned $37,000 or less in the financial year, and you need to make a non-concessional contribution to their superannuation account of at least $3,000. Therefore, the maximum offset available is $540 (which is $3,000 x 18%). If your spouse earns between $37,000 and $40,000, then you will attract a partial offset.
A tax offset doesn’t just reduce your taxable income as tax deductions do; an offset directly offsets your tax liability. A tax deduction of $540 would see you save between $102 and $243. But a tax offset gets you a discount of the full $540 off your tax bill.
Important to note:
- 1. You cannot claim the tax offset for contributions that you made to your SMSF then split with your spouse.
- 2. Whilst you can contribute more than $3,000 to your spouse’s superannuation, be mindful of their non-concessional contributions cap.
- 3. Also, bear in mind that contributions do not exceed their Total Superannuation Balance limits.
Any capital gain that your SMSF makes within the financial year will need to be included in the SMSF’s assessable income. To ensure an efficient tax outcome, review your capital gains positions to potentially offset gains with losses.
For example, say you sold down four different assets within the 2020-21 financial year, and each triggered a capital gain of $2,000. The SMSF is now liable to pay Capital Gains Tax on $8,000 (4 x $2,000). However, say the SMSF is also invested in some assets that have dropped in value over the course of the financial year and have un-realised capital losses. You could effectively ‘realise’ those losses to offset the tax payable on the $8,000 gain. As an example, you might realise a $5,000 capital loss.
Capital Gain $8,000 – Capital Loss $5,000 = Net Capital Gain of $3,000
Now, the SMSF only has to pay Capital Gains Tax on $3,000, not $8,000.
Top Tax Tip: Don’t wind up in a situation that you’re paying more capital gains tax than required; always engage the assistance of a registered tax agent when calculating the precise amount of capital gains tax payable. This is because it can become tricky within the SMSF environment as complying SMSFs are entitled to a CGT discount of 1/3 if the relevant asset has been owned for at least one full year and may be eligible for other relevant concessions.
Review Fund’s Investment Strategy
Now is the time for SMSF Trustees to review the fund’s Investment Strategy to ensure it remains appropriate in supporting your financial requirements for retirement. It is especially important to remedy any breaches found in the last financial year before you have your SMSF audited again.
Have your SMSF audited correctly
Last but not least, ensure that you have engaged a qualified tax practitioner to audit your SMSF. You cannot lodge your SMSF tax return until an audit has been completed, so it’s essential to have your SMSF audited on time each year to remain compliant. Failure to conduct an audit could result in a non-compliance notice which would mean all of your tax planning goes out the window — the fund would lose the concessional tax rate and would be taxed at 45%, franking credits would not be able to be claimed, and you would not be able to carry forward any tax or capital loss.
Not having your SMSF audited could be catastrophic! So don’t forget to organise it.
That brings us to the end of another financial year! As always, it’s a busy time with lots to do, but it’s important to appropriately address taxation strategies to minimise your liability and maximise your retirement savings.
If you would like to speak to someone about any of the topics raised here, reach out to us, and we’ll put you in contact with the right people.