This article looks at two common timing issues: the timing of end-of-year contributions, and achieving the most benefit from reversionary pensions.
Watch the end-of-year contribution timing, especially this year
If you’re looking for a tax deduction for superannuation contributions, there are a few things to know. Tightening the timing a little this year is the fact that 30 June 2019 is on a Sunday.
If you make a contribution to a superannuation fund well in advance of 30 June, there should be no issue if you wish to claim the deduction.
However, if you delay to the last minute, you could be in for a shock as the contribution needs to be made before 30 June. Give yourself enough leeway, considering that some banks may not include a Sunday in their normal processing times.
Making super contributions to your fund is the easy bit. You can transfer cash electronically or by cheque, but the two have timing timing.
The Australian Taxation Office (ATO) allows a timing exception for cheques. Where a cheque is given to a fund prior to 30 June, but the fund does not bank it until the new financial year, the ATO will still regard it as a pre-30 June contribution.
But the exception will not apply if the transfer has been made electronically and it does not register in the fund’s bank account until next financial year. There’s already been several tax cases involving the timing of contributions where the taxpayer was the loser.
You can also transfer a limited range of investments to your fund and claim a tax deduction for the value transferred. For listed shares and other securities, the transfer will take place by an off-market transfer (OMT).
You can also transfer commercial or farming property to your fund as a contribution. However, depending on the value of the property, you need to be careful because the value transferred as a contribution may breach the caps with excess contribution penalties applicable.
How much to contribute
The current cap for tax deductible super contributions is $25,000 and includes any contributions made by your employer, salary sacrifice and superannuation guarantee contributions, as well as any personal contributions you claim as a tax deduction. Once you have exceeded the cap, any excess plus a penalty interest component can be taxed at your personal tax rate providing you withdraw it from your fund. Or, you can leave it in the fund and the excess will be taxed at 47% and also be counted against your non-concessional contribution cap.
Make sure that before you make the contribution, you make an estimate of other tax-deductible contributions that have been made to the fund for you, such as employer super contributions. This will allow you to maximise the tax deduction without having some of the contribution being excess or treated as a non-concessional contribution.
Claiming a tax deduction for personal super contributions does have some limits. You are not permitted to allow it to create or increase a tax loss. For example, say you run a business as a sole trader or partner which has made a tax loss for the year and you haven’t received any other taxable income. You won’t be able to claim a tax deduction for personal superannuation contributions as the amount claimed will add to the tax loss you have made from the business.
Making the election
Before you can claim a tax deduction for personal contributions, you must let the fund know that you intend to claim the deduction. The fund must send you an acknowledgement of the amount you intend to claim in your personal tax return. You will need to provide the election to the fund before your income tax return for the relevant tax year is lodged, or by the end of the tax year after the contribution has been made, whichever happens first. If you provide the election to your fund after the required time you will not qualify for the deduction.
Reversionary pension timing tips
A reversionary pension is an income stream superannuation benefit paid to an SMSF member following the death of another member.
When a reversionary pension is reported for the Transfer Balance Cap (TBC), it is not counted against the reversioner’s cap until the anniversary of the original pensioner’s death. This sounds relatively simple, but an excess TBC determination can issue even where the reversioner has commuted one or more pensions to stay within their $1.6 million TBC and has reported the commutation to the ATO in time.
No matter how early it is reported the problem still arises even when it is reported on the day of the commutation.
Case study when the account passes to a surviving spouse
Let’s look at a case study illustrating the issues that can happen in one situation.
Mark and Lyn were both members of their SMSF on 1 July 2017 and both were receiving account-based pensions which provide reversions to the surviving spouse. Each pension had an account balance of $1 million at that time which was reported to the ATO for TBC purposes.
On 31 May 2018, Mark passes away and the balance in his account-based pension account at that time was $800,000. This was payable to Lyn as the surviving spouse.
If Lyn doesn’t do anything, the balance of the reversionary pension at the time of Mark’s death will be counted against her TBC on 31 May 2019, the anniversary of Mark’s death, and will create an excess TBC determination of $200,000 ($1.8 million less the $1.6 million cap).
The excess TBC determination will require Lyn to commute $200,000 out of pension phase by either:
- Commuting $200,000 from her existing account-based pension and transferring it to accumulation phase or cashed out as a lump sum, or
- Commuting $200,000 from the reversionary pension and cash it out as a lump sum.
If Lyn or her adviser understood how the TBC rules operate, the commutation should take place on 31 May 2019 to get the best of all possible options. The strategy would maximise the tax exemption on income from investments supporting Lyn’s account-based pension and the reversionary pension. It would also ensure that the value of the pensions calculated for TBC purposes remain within her TBC. Of course, during the year, Lyn would be required to draw at least the minimum account-based pension and reversionary pension.
If Lyn was to commute $200,000 of one of the pensions on 31 May 2019 there should be no issues as the combined value of the pensions counted for TBC purposes has been reduced to $1.6 million. For TBC reporting purposes, there is no mandatory requirement to report the commutation of the pension until the time the compliance and tax return for the SMSF has been lodged, possibly in May 2020.
Waiting to report Lyn’s commutation in May 2020 is certainly not the best strategy for Lyn’s TBC as the ATO will issue an excess TBC determination to her. But, reporting the commutation as soon as it has occurred may provide no better outcome as the ATO will still issue an excess TBC determination.
What happens in practice is that on the anniversary of the commencement of the reversionary pension to Lyn which is 31 May 2019, the ATO will issue the excess TBC determination to her. Even if she was to report the commutation of one of her pensions on the day it took place, the excess TBC would issue as the commencement of the reversionary pension would have been reported previously to the ATO after Lyn became entitled to it.
How does this happen?
The problem with the mismatch with the SMSF Transfer Balance Account Report (TBAR) reporting cycles which result in the 31 May 2019 pension commutation not being reported before the ATO has already made the excess TBC determination on the anniversary date of the death of the deceased.
If the fund was to do nothing about reporting the commutation to the ATO, Lyn could be worse off. The reason is that after the excess TBC determination has issued, she has 60 days to comply with the commutation authority issued as part of the determination. This will result in a double commutation, the first when one of the pensions is commuted on 31 May 2019 and the second made to comply with the commutation authority so that the determination will be satisfied.
Ideally, this should not happen, but it is more unfortunate to occur where a surviving spouse is in receipt of a reversionary pension. Maybe a slight delay in issuing the excess TBC determination or notifying the reversionary that an excess TBC determination is to issue may help the surviving spouse experiencing any undue anxiety.
Graeme Colley is the Executive Manager, SMSF Technical and Private Wealth at SuperConcepts, a sponsor of Cuffelinks. This article is for general information purposes only and does not consider any individual’s investment objectives.
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