Which comes first, contribution acceptance or caps?
The changes made to the contribution acceptance rules have been in place for over a year now. The ‘work test’ for those aged 67 to 75 (up to 28 days after the end of the month of turning 75) was removed from the contribution acceptance rules in the SIS Regulations, along with the work test exemption rule from 1 July 2022. No longer does a fund trustee need to consider the work status of a member in this age bracket when accepting a contribution that is not a mandated employer or downsizer contribution.
However, the ‘work test’ and the ‘work test’ exemption is relevant where a member, aged 67 to 75 (up to 28 days after the end of the month of turning 75) wants to claim a deduction for personal super contributions made in the 2022–23 and following income years.
The trustee of the superannuation fund however is not required to assess compliance with the ‘work test’ or ‘work test’ exemption for tax purposes, it will be assessed by the ATO as part of lodgement of the member’s own income tax return.
Despite this change to the contribution acceptance rule in the SIS Regulations, there continues to be confusion about how the contribution acceptance rules that reside in the SIS Regulations interact with the contribution cap rules contained in the Tax Act.
Let’s consider the following scenario:
Frank is aged 69. He has a total superannuation balance (TSB) at 30 June 2023 of $2.05 million. He has not been gainfully employed for several years and does not intend to ever be gainfully employed again.
Can a superannuation fund accept a contribution of $110,000 from Frank in the 2023–24 financial year?
Yes. From 1 July 2022, the ‘work test’ for those aged 67 to 74 was removed from the contribution acceptance rule in SIS regulation 7.04. That is, a person aged 67 to 74 does not have to satisfy the ‘work test’ for the trustee of a superannuation fund to be able to accept a personal contribution.
It should be noted that a superannuation fund trustee cannot accept a contribution from a member after the period ending 28 days after the end of the month in which they turn 75, other than downsizer contributions. A superannuation fund trustee can also accept employer-mandated contributions in respect of a member aged 75 or older.
What if this all occurred in the 2021–22 financial year and all the numbers were the same – could the superannuation trustee(s) accept the contribution from Frank?
No. Prior to 1 July 2022, a superannuation fund trustee could not accept a contribution from a member aged 67 to 74 (up to 28 days after the end of the month the member turns 75) unless they satisfied the ‘work test’, other than a downsizer contribution.
The ‘work test’ required the member to be gainfully employed for at least 40 hours in 30 consecutive days within the income year the member made the personal contribution. Generally, the ‘work test’ had to be satisfied prior to the superannuation fund trustee accepting the contribution.
As Frank was aged 67 to 74 at the time of the contribution and did not satisfy the ‘work test’ in the income year, the superannuation fund trustee could not have accepted the contribution. The fund trustee(s) would have been required to return the contribution to the member.
Why was there no reference to Frank’s prior 30 June total superannuation balance (TSB) in either of the above answers?
In short, a person’s TSB has no relevance to the contribution acceptance rules. The fact that Frank has a prior 30 June TSB in excess of the general transfer balance cap does not affect the ability of the fund trustee(s) to accept his member contribution.
A superannuation fund trustee does not care about a member’s TSB … but Frank certainly does.
A member’s prior 30 June TSB determines the amount of their non-concessional cap. As Frank’s prior 30 June 2023 TSB was more than the general TBC of $1.9m his non-concessional cap for 2023-24 is nil. Consequently, all of the $110,000 contributions he made is an excessive non-concessional contribution.
Frank cannot request his fund to refund the contribution due to his prior 30 June TSB being more than the general TBC. Again, a member’s prior 30 June TSB has no relevance to whether the fund can accept Frank’s personal contribution.
The ATO will issue Frank with an excess non-concessional contribution determination. The excess determination will outline Frank’s options for dealing with the excess amount.
The approach to contribution acceptance and application of caps
The first consideration is to determine whether the fund trustee(s) could have accepted the contribution made by or on behalf of the member. From 1 July 2022 the contribution acceptance rules, per SIS Regulation 7.04, permit the trustee(s) to accept as follows
Acceptance of contributions
If a member:
then the fund may accept contributions made in respect of the member that are:
is less than 55 years
(a) employer contributions, or
(b) member contributions
is between 55 and 74 years
(a) employer contributions, or
(b) member contributions
is 75 years or older
(a) mandated employer contributions, or
(b) downsizer contributions
The rules also make it clear that an SMSF trustee may also accept contributions made in respect of a member, and received on or before the day that is 28 days after the end of the month in which the member turns 75, that are:
(a) Employer contributions other than mandated employer contributions, or
(b) Member contributions other than downsizer contributions
The 1 July 2022 changes to the contribution acceptance rules mean that from that date a superannuation trustee will no longer be required to ascertain if a member, aged 67 to 74, satisfies the ‘work test’, including the $300,000 total superannuation balance work test exemption, prior to accepting a contribution, other than a mandated employer superannuation contribution or a downsizer contribution.
However, there are other contribution acceptance rules that the superannuation trustee still needs to comply with, namely:
- Member’s tax file number (TFN) – where a member does not provide their TFN to the superannuation trustee, the fund cannot accept member contributions. This would be expected to be an uncommon occurrence in an SMSF, considering the relationship between members and the SMSF trustee(s). Non-quoting of a member’s TFN can also mean an additional tax on contributions.
- Contributions from a non-related employer via SuperStream – an SMSF will be required to have an Electronic Service Address (ESA) to receive associated SuperStream data for contributions received from a non-related employer in respect of an SMSF member. The contribution must also be made electronically to the SMSF.
- An SMSF trustee can also accept a contribution where the trustee(s) is reasonably satisfied that the contribution is respect of a certain period, as outlined in the table in sub-regulation 7.04(1), for which the trustee could accept the contribution, despite the contribution actually being made after that period when the trustee could not accept the contribution.
- An SMSF trustee can also accept a contribution, to the extent that the amount does not exceed the member’s CGT cap amount in relation to an earnout arrangement, where the related CGT event occurred during a period for which the SMSF trustee could have accepted the contribution.
- In-specie contributions – generally, an SMSF trustee must not intentionally acquire an asset from a related party. However, there are exceptions to this prohibition, with the significant exceptions being: listed securities and ‘business real property’.
An SMSF trustee must return contributions to the contributor in the following circumstances:
- The contribution is a member contribution, and the member has not quoted their tax file number within 30 days of the amount being received by the trustee, or
- The amount was received in a manner that is inconsistent with the table in SIS Regulation 7.04 (the table outlined above).
The contribution must be returned to the contributor within 30 days of the trustee becoming aware that they should not have accepted the contribution. For an SMSF, the ATO considers that the trustees of an SMSF (or directors of a corporate trustee) are aware that a contribution is in breach of the contribution acceptance rules when they become aware of the contribution itself.
This would generally be on the day the contribution is received. Further, the ATO view is that the 30-day requirement obliges funds to return contributions without delay. The trustee remains obliged under SISR sub-regulation 7.04(4) to return the amount, even if more than 30 days have elapsed since the trustee(s) became aware of the obligation.
Once it is determined that the superannuation trustee can accept a contribution in respect of a member, consideration turns to the contribution cap consequences of the contribution for that member. The purpose of contribution caps is to restrict the amount of capital that an individual can transfer to a concessionally taxed superannuation fund.
A member whose total contributions in an income year exceed the relevant contribution caps may be liable for additional tax on the amount that exceeds the relevant contribution cap.
Superannuation contributions will generally be subject to one of the following contribution caps:
- Concessional contribution cap
- Non-concessional contribution cap
Certain contributions either do not have a contribution cap or are subject to a special contribution cap, as follows:
- Contributions that are not subject to a contribution cap:
- Government co-contributions
- Low income superannuation tax offset (LISTO) contributions
- Contributions from structured settlements or orders for personal injuries
- Contributions that are subject to a special contribution cap:
- Downsizer contributions
- Contributions made by an eligible person that arise from a capital gains event or from a ‘CGT look-through earnout right’ that also meets the requirements of either the:
- CGT small business retirement exemption or
- CGT small business 15-year exemption
- Contribution of previously received COVID-19 temporary early release superannuation benefit payment
So, after it’s determined that the contribution could be accepted by the fund trustee(s), it’s important to determine which contribution cap, if any, applies. Where a cap does apply, it will be prudent to determine the amount of the cap and whether or not the contribution accepted is within that cap, or if it has been exceeded.
Where a person has exceeded the relevant contribution cap, the excess contribution cap rules apply … and that’s another story (article).