SMSF practitioners should be aware that the rules relating to the total superannuation balance and a member’s ability to make contributions after 30 June are different for defined benefit funds, says a technical expert.
SuperConcepts executive manager of SMSF technical and private wealth Graeme Colley says one of the confusing aspects of the super reforms is the way the rules for concessional contributions and non-concessional contributions operate for members of defined benefit funds.
Mr Colley said different rules apply to the valuation of defined benefit pensions, which are based on the pension payable and a special valuation factor.
“For non-concessional contributions, the value of the defined benefit pension or the amount of contingent liability for the pension isn’t taken into account in working out whether somebody’s balance is greater than $1.6 million,” Mr Colley told SMSF Adviser.
Where the value of a member’s balance is greater than $1.6 million, this would prevent them from making further non-concessional contributions to a super fund.
“So for public servants, they’re still able to put non-concessional contributions into superannuation where it relates to that constitutionally protected or defined benefit fund,” Mr Colley said.
“With concessional contributions, what happens there is that if more than $25,000 goes to a defined benefit fund, then it’s deemed to be [a] maximum of $25,000. So it doesn’t matter how much goes into the constitutionally protected fund or a defined benefit fund, it will still only be $25,000 deemed against the $25,000 cap.”
If someone is a member of one of these funds, and they’ve also got an SMSF, going forward, if they exceed the $25,000 for the defined benefit fund, it means they won’t be able to put any contributions into their SMSF, Mr Colley explained.
Another thing SMSF practitioners should be aware of is that when benefits are paid out of a defined benefit fund, there is a certain order in which they are treated for tax purposes depending on the type of defined benefit fund and whether it’s a taxed or untaxed fund.
With untaxed funds, there is a tax offset, but with taxed funds, the first $100,000 of the pension the member receives is tax free, Mr Colley said.
“So there’s a special order; I don’t think many people know about that,” he said.
“One’s entitled for a tax offset and another one is entitled to a tax-free portion.”
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