This week I’ll run over the remaining things you need to check off your to-do list before the end of the financial year. Due to changes in the Federal Budget, it may work to your benefit to consider some of these actions this financial year rather than next year.
Last week I ran over the first four actions on the list, which were:
- Government co-contributions
- Transitional concessional contributions cap for over 50s reverting to general cap
- Directed termination payments (DTPs) benefits ending 30 June
- Off market transfers
You can click here [1] to re-read them.
Here are the remaining things you need to think about before 30 June.
5. Settlement of contributions
For last minute contributions, ensure that settlement, and not just the contribution occurs before 30 June. Refer to TR 2010/1 to understand when a contribution is deemed to be made depending on the way it is transferred into the superfund.
Benefit and Strategy
The contributions will occur in the intended financial year. Especially since 30 June falls on a Saturday, making last minute contributions on 29 or 30 June may only settle on the following Monday. By allowing sufficient time for settlement, it avoids a contribution mistakenly made in the next financial year, and if those caps are fully used, it may inadvertently breach the caps.
6. Age 65 – bring forward rule
The bring forward rule for non-concessional contributions enables individuals under 65 to bring forward two years’ worth of non-concessional contributions into the same income year, allowing a total contribution of $450,000 without breaching the cap. They can’t then make non-concessional contributions to super for the next two years.
What are the benefits?
For individuals who have turned 65 this financial year but were aged 64 on 1 July 2011, a final opportunity exists to use this bring forward rule. For those wishing to contribute a large lump sum into super, such as sale proceeds from property or other assets, they should look at taking advantage of the bring forward rule. This is also valuable in contributing a lumpy asset into super up to $450,000 without having to do it in $150,000 tranches per year to avoid exceeding the cap. Bear in mind that if the individual is aged 65 at the time of the contribution, they will also have to meet the work test before the contribution is made.
If the individual over 65 doesn’t use the bring forward rule this year, they will still be able to access the normal $150,000 cap in future years up to age 75, provided the work test is satisfied.
Strategy
Ensure that if the intention is to contribute sale proceeds into super, the sale process is settled with enough time to contribute the funds and settle into the super fund account before 30 June. Likewise for asset contributions, confirm the asset will be transferred into the name of the super fund before June 30. The risk of delayed settlement means the contribution will occur next financial year when caps are reduced to $150,000. Excess non-concessional tax will mean the fund may need to pay an additional 46.5% tax on top of the tax already paid by the individual, which depletes the contribution.
Importantly, ensure that any other non-concessional contributions have been taken into account, such as contributions made earlier in the year, and excess concessional contributions that are then classified as non-concessional. Also if personal deductible contributions made are greater than the individuals taxable income, these will also be classified as non-concessional and may cause the cap to be breached if it is of significant value.
7. Contribution reserving strategy
SMSFs are entitled to have a contribution reserve which holds unallocated contributions made to the fund. They are required to allocate the contribution to the member’s account within 28 days after the end of the month in which the contribution is received.
What are the benefits?
A contribution reserving strategy is beneficial for a member who wishes to make a personal deductible contribution to the super fund and claim the deduction in the current financial year, without the contribution being added to their account in the same year to avoid breaching the concessional cap. The only time of the year where this strategy would work is in when the contribution occurs in the month of June. The deduction would be claimable in this financial year, and within 28 days after the end of the month, in July, the contribution is allocated and then counted towards the member’s cap. This could also work for employer contributions and non-concessional contributions to avoid breaches of the cap.
Strategy
Members must check the SMSF deed to ensure the fund can use a reserving strategy. Also a reserving strategy, which is different to an investment strategy, should be in place. Ensure that the contribution is made after 1st June and before 30 June, otherwise contributions will be allocated in the unintended financial year.
8. Minimum pension for the year
Account based pensions are required to meet minimum annual pension payments. This includes transition to retirement (TTR) income streams. The minimum factors [3] depend on the opening balance of the pension and the age of the pensioner. The minimum pension for both 2012 and 2013 financial years has been set at 75% of legislated minimums to assist funds that continue to be affected by the GFC.
What are the benefits?
If the fund doesn’t pay the minimum annual pension percentage, the payment may not be considered a pension payment. This means that the assets that would be supporting the pension will lose entitlement to the exempt current pension income, so the income generated from those assets will be subject to tax. Paying the minimum pension before 30 June will ensure that the fund retains its pension status and retains the tax advantages of doing so.
Strategy
The minimum pension payment is only required to be paid annually. If it has not already been done, ensure the payment is done prior to 30 June. It is not too late to receive the payment now as long as it is received this financial year.
Important information: 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. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.