SMSFs flagged on planning opportunities for EOFY concessional contribution strategies
SMSFs can utilise certain concessional contribution strategies that will be particularly suited to cap off the end of the financial year and create further planning opportunities for the SMSF position at the start of next financial year, according to technical specialists.
Approaching this end of the financial year, SMSFs can seek to maximise concessional contributions (CCs) by making personal deductible contributions, as clients can make personal deductible contributions to super where they are eligible to make member contributions and have sufficient assessable income to claim a tax deduction, regardless of their employment situation.
However, there are always risks, especially around traps when maximising the contributions the client can make and the dangers of going over their concessional or non-concessional contribution cap.
For concessional contributions, it is important to note the universal standard cap of $25,000 that applies if SMSFs qualify, according to SuperConcepts technical executive manager Graeme Colley.
He noted if their total super balance (TSB) on 30 June 2020 is less than $500,000, they can have the benefit of bringing forward any unused concessional contributions. These are the concessional contributions under the cap that haven’t been claimed since 1 July 2018.
“Time frames are always important to pay attention to if your clients wish to claim a tax deduction for personal concessional contributions,” Mr Colley said.
“An election must be made to their SMSF, setting out the amount they will be claiming and must be lodged with the fund. It must be done before their personal tax return is sent to the ATO for the 2020–21 financial year and no later than the end of the financial year after the contribution was made.
“Remember, there’s a bit of a twist, as you need to lodge the notice with the fund before any part of the contribution is withdrawn or used to start a pension. Your client’s SMSF also needs to acknowledge their election before you lodge their income tax return.”
Colonial First State technical specialist Linda Bruce said SMSFs can start reviewing the amount of employer contributions (e.g. super guarantee and salary sacrifice contributions) and make personal contributions up to the member’s concessional contributions cap before the financial year ends.
“A valid notice of intent to claim a deduction form needs to be lodged within the required time frame so that the client can claim a tax deduction in their individual tax return,” Ms Bruce said in the CFS FirstTech update.
“If a client receives a lump-sum bonus or leave payment that represents entitlements that they have already earned, they generally cannot salary sacrifice the amount to super. However, they can instead make a personal deductible contribution up to their remaining CC cap to reduce their taxable income.
“Where an employer does not offer an employee the option to salary sacrifice, an employee can make a personal deductible contribution before the end of the financial year, within their remaining CC cap, to achieve the same tax-effective outcome.”
However, it is important to consider the several risks making a personal contribution to super and lodging a notice of intent (NOI), according to Ms Bruce.
As the amount of super contributions that can be claimed as a deduction is limited to an individual’s assessable income, less other deductions, it is not possible to create a tax loss by claiming a deduction for personal super contributions.
Any amount specified in the NOI that is disallowed as a deduction by the ATO will also count towards the member’s non-concessional contributions cap, and Ms Bruce noted it may result in breaching the NCC cap. This can happen if the individual does not have sufficient assessable income (less other deductions) to claim the deduction.
“A personal contribution that is allowed to be claimed as a deduction by the ATO in the individual’s tax return counts towards their CC cap,” Ms Bruce explained.
“A member’s SG and salary sacrifice contributions need to be assessed before determining how much should be claimed as a deduction when lodging the notice of intent, so as not to breach the CC cap.
“As taxable income below the effective tax-free threshold is taxed at 0 per cent at the personal level, compared with 15 per cent if made to super via concessional contributions, it is not worth making a personal deductible contribution that reduces taxable income below the effective tax-free threshold.
“The effective tax-free threshold for the 2020–21 financial year, after applying the low-income tax offset (LITO) and the low and middle-income tax offset (LMITO) is $23,226. The tax-effective threshold is higher if the client is eligible for the seniors and pensioners tax offset, or is eligible for other non-refundable tax offsets.”
Meanwhile, if this is a year of unusually high taxable income, a double contribution strategy might be considered, according to SMSF Alliance principal David Busoli.
Mr Busoli noted this will require an additional amount to be contributed in June. Because this additional contribution will count against next year’s cap, you could use $27,500.
“Be cautious, as this strategy will utilise all next year’s contribution limit,” he warned in a blog.
“Remember that you may be able to increase the amount by last year’s unused concessional contributions.”
It is important to remember members over 75 may only receive SG contributions, and members over 67 when the contribution is made will need to meet the work test. Mr Busoli said the concessional cap includes any employer contributions including SG contributions and a tax deduction may be taken for personal contributions.
“There is no longer a requirement to be substantially self-employed under the 10 per cent rule,” he said.
“Furthermore in-specie contributions of allowable assets may be made. There will be capital gains tax and stamp duty consequences. The deemed date of contribution will generally be the date on a validly completed transfer form.”