There is often confusion around the size and timing of last minute super contributions into an SMSF in one’s sixty fifth year. But by following some simple steps, an easy route may be found to understand what’s required.
Before you reach 65 it is possible to make your superannuation contributions at any time or your employer can make contributions for you without any timing restrictions.
Once you are 65, the rules become a little more complex because work tests must be satisfied in the year the contributions are made. During the year you turn 65 knowing the rules can be important as they can be more difficult to understand.
Contributing in your 65th year
Once you reach 65 you must meet a work test of at least 40 hours in 30 consecutive days during the financial year to contribute. The amount of the contribution that can be made to super in your sixty fifth year is up to $540,000 for non-tax deductible contributions, if you meet certain conditions and up to a total of $35,000 of tax deductible contributions made to your super account(s).
If you wish to make a personal non-deductible contribution of up to $540,000 in your sixty fifth year, you will need to check the contributions you have made in the previous two years. The reason is that if you have made non-deductible contributions of no more than the standard cap of $180,000 in each of those years, you are able to use a two-year bring forward rule, which allows you to contribute up to three years standard contribution in the one year. The higher cap of $540,000 applies to non-deductible contributions in your sixty fifth year, even if you will not be working in the years you turn 66 and 67.
Meeting the work test in your sixty fifth year.
- Tim reaches 65 on 31 January 2015 and has not worked since he was 63. If he wishes to contribute to super, he must do it before his sixty fifth birthday as he will not meet the work test during this financial year and cannot contribute once he reaches 65. Alternatively, he could always get a job of at least 40 hours in 30 consecutive days during the financial year, which would allow him to contribute to the fund in that year.
- Mitchel wishes to make the maximum non-deductible contribution in the year he reaches 65 on 1 March 2015. In the previous two financial years he made a non-deductible contribution of $100,000 in the 2012-13 financial year and $150,000 in the 2013-14 financial year. As these contributions were not greater than the standard non-deductible contribution limit for those financial years, he could contribute up to $540,000 without penalty by using the bring forward rule.
Contributing too much
Believe it or not, there is no limit to the amount of tax deductible and non-deductible contributions that can be made to superannuation.
However, there are some occasions when the fund is required to refund part or all of a contribution to you. This will occur if your non-deductible contribution to the fund exceeds your contribution cap – $180,000 if you are older than 65 and $540,000 if you are under 65.
And if the fund is able to accept the non-deductible contributions you have made and they are greater than the contribution cap that applies, you may end up having to pay a penalty tax on any excess that you make to the fund. In some cases you are able to receive a refund of the excess contribution or you may wish to leave it in the fund, if the rules permit.
- Robbie who is 65 on 31 March 2015 made a non-deductible contribution to super on 1 October 2014 of $600,000 in one amount. As the non-deductible contribution made by Robbie exceeds his non-deductible contributions cap of $540,000, the super rules require any excess to be refunded to him within 30 days. Therefore under the super rules the fund will need to refund $60,000 to Robbie, which should have been made within 30 days of the contribution being made.
- Sonja who is 65 in March 2015 made two contributions to her super fund. One contribution was for $400,000 and the other was for $300,000. Unlike Robbie’s situation where one non-deductible contribution was made that exceeded the cap, in Donna’s case as two contributions each less than the cap were made, there is no requirement under the super rules for an automatic refund. In Donna’s case the amount in excess of her non-concessional contributions cap will be subject to a penalty tax.
Make sure you quote your tax file number
Quoting your tax file number (TFN) is very important if you wish to make personal contributions to super. If you don’t quote your TFN, the fund will not be able to accept any personal contributions no matter how much they are.
Putting it altogether
*Once a person reaches 75 they can contribute up until 28 days after the month in which they turn 75.
They are the simple steps to make sure you don’t get caught up with contributions being refunded or facing tax penalties just because you contributed too much at the wrong time.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.