SMSFs: What happens if you exceed your super caps

The rules around making some types of super contributions have been relaxed in recent years, so it’s worth exploring the different opportunities available to you before making a large contribution.i

What are contribution caps?

Given the tax-effective environment of Australia’s super system, there are annual limits on how much you can contribute each financial year.

The two main types of contributions are concessional (before-tax) and non-concessional (after-tax) contributions.

Concessional contributions include employer Super Guarantee contributions, salary sacrifice and personal tax-deductible contributions, with the general contributions cap for 2023-24 being $27,500. In some situations, you may be permitted to contribute more if you have unused cap amounts from previous financial years.

If you’re a SMSF member, you may be able to make a concessional contribution in one financial year and have it count towards your concessional cap in the following financial year.

Non-concessional contributions cap

If you use after-tax money to make a super contribution, this is classes as a non-concessional contribution and there is no tax payable when the contribution is paid into your super account.

The general non-concessional contributions cap in 2023-24 is $110,000 provided you meet all the eligibility criteria, such as your Total Super Balance being below your personal limit. Your personal cap may be different.

If you’re age 55 or older, the once-only downsizer contribution cap is $300,000 per person ($600,000 for a couple). These contributions from the sale of your main residence don’t count towards your annual non-concessional cap.

Exceeding your contribution caps

There are different rules for super contributions that exceed the annual caps, depending on the type of contribution.

If you go over the annual concessional cap, your contribution is counted as personal assessable income and taxed at your marginal tax rate, with a 15 per cent tax offset to reflect the tax already paid by your super fund. Your increased assessable income may also affect any Medicare levy, Centrelink benefits and child support obligations.

The excess contributions can be withdrawn from your super fund, but if you choose not to withdraw them, the excess is counted towards your non-concessional contributions cap.

If you don’t or can’t elect to release excess contributions, you could end up paying up to 94 per cent in tax.ii

Exceed your non-concessional cap

Contributions exceeding your annual non-concessional (after-tax) cap are taxed at 45 per cent plus the 2 per cent Medicare levy. This is in addition to the tax already paid on this money.

Before the ATO applies this tax, you are given the opportunity to withdraw the excess non-concessional contributions, plus a notional amount to reflect the investment earnings.

You pay tax on the notional earnings just like personal income, less a 15 per cent offset.

Withdrawing excess contributions

Like most things to do with tax and super, the process for withdrawing excess contributions is fiddly.

If you have an excess concessional contribution, the ATO sends you a determination letter with details of what you need to do, plus an income tax notice of assessment.

You have 60 days to decide whether to have the excess concessional contribution refunded by the super fund and tax deducted by the ATO, or to pay the tax personally and leave the contribution in your account.

Refunding excess non-concessional contributions

For excess non-concessional contributions, the ATO assumes you wish to have your excess contributions and notional earnings refunded in order to avoid paying 47 per cent on them.

The default process is the ATO automatically issues a release authority to your fund and directs it to deduct the additional tax owing and return the leftover amount to you.

If you wish to nominate a specific fund from which the refund should be paid, or leave the excess in your account and pay the tax personally, you must make an election within 60 days of the initial notice.

Call us today to assess how the super contribution caps may affect you.

i https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/caps-limits-and-tax-on-super-contributions/restrictions-on-voluntary-contributions
ii https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/caps-limits-and-tax-on-super-contributions/concessional-contributions-cap

Mortgage vs super

With interest rates on the rise and investment returns increasingly volatile, Australians with cash to spare may be wondering how to make the most of it. If you have a mortgage, should you make extra repayments or would you be better off in the long run boosting your super?

The answer is, it depends. Your personal circumstances, interest rates, tax and the investment outlook all need to be taken into consideration.

What to consider

Some of the things you need to weigh up before committing your hard-earned cash include:

Your age and years to retirement

The closer you are to retirement and the smaller your mortgage, the more sense it makes to prioritise super. Younger people with a big mortgage, dependent children, and decades until they can access their super have more incentive to pay down housing debt, perhaps building up investments outside super they can access if necessary.

Your mortgage interest rate

This will depend on whether you have a fixed or variable rate, but both are on the rise. As a guide, the average variable mortgage interest rate is currently around 4.5 per cent so any money directed to your mortgage earns an effective return of 4.5 per cent.i

When interest rates were at historic lows, you could earn better returns from super and other investments; but with interest rates rising, the pendulum is swinging back towards repaying the mortgage. The earlier in the term of your loan you make extra repayments, the bigger the savings over the life of the loan. The question then is the amount you can save on your mortgage compared to your potential earnings if you invest in super.

Super fund returns

In the 10 years to 30 June 2022, super funds returned 8.1 per cent a year on average but fell 3.3 per cent in the final 12 months.ii In the short-term, financial markets can be volatile but the longer your investment horizon, the more time there is to ride out market fluctuations. As your money is locked away until you retire, the combination of time, compound interest and concessional tax rates make super an attractive investment for retirement savings.

Tax

Super is a concessionally taxed retirement savings vehicle, with tax on investment earnings of 15 per cent compared with tax at your marginal rate on investments outside super.

Contributions are taxed at 15 per cent going in, but this is likely to be less than your marginal tax rate if you salary sacrifice into super from your pre-tax income. You may even be able to claim a tax deduction for personal contributions you make up to your annual cap. Once you turn 60 and retire, income from super is generally tax free. By comparison, mortgage interest payments are not tax-deductible.

Personal sense of security

For many people there is an enormous sense of relief and security that comes with having a home fully paid for and being debt-free heading into retirement. As mortgage interest payments are not tax deductible for the family home (as opposed to investment properties), younger borrowers are often encouraged to pay off their mortgage as quickly as possible. But for those close to retirement, it may make sense to put extra savings into super and use their super to repay any outstanding mortgage debt after they retire.

These days, more people are entering retirement with mortgage debt. So whatever your age, your decision will also depend on the size of your outstanding home loan and your super balance. If your mortgage is a major burden, or you have other outstanding debts, then debt repayment is likely a priority.

All things considered

As you can see, working out how to get the most out of your savings is rarely simple and the calculations will be different for everyone. The best course of action will ultimately depend on your personal and financial goals.

Buying a home and saving for retirement are both long-term financial commitments that require regular review. If you would like to discuss your overall investment strategy, give us a call.


i https://www.finder.com.au/the-average-home-loan-interest-rate

ii https://www.chantwest.com.au/resources/super-members-spared-the-worst-in-a-rough-year-for-markets

How do SMSFs invest?

As Australia’s system of compulsory superannuation celebrated its 30th anniversary in July, this is a good time to take a closer look at one of super’s biggest success stories – the number of people deciding to take control of their retirement savings with a self-managed super fund (SMSF).

There are now almost 607,000 SMSFs worth a combined $894 million, with 1.1 million members.

While one of the benefits of running your own fund is the flexibility to chart your own course, concerns have been raised over the years that SMSFs are too heavily invested in cash and shares and not as well diversified as large public funds. The latest figures show these concerns are largely unfounded.


Comparing SMSFs and large funds

SMSF administrator, SuperConcepts recently surveyed 4,500 funds to find out how SMSF trustees invest and identify any emerging trends.i They also wanted to see how SMSFs compare with large APRA-regulated funds including – industry, retail, public sector and corporate funds – in terms of their investments.

The table below shows the overall asset breakdown as at 31 March 2022.

Asset typeSMSF %APRA fund %
Cash and short-term deposits12.29.1
Australian fixed interest8.410.0
International fixed interest2.17.9
Australian shares40.028.5
International shares16.427.0
Property16.08.5
Other (incl. infrastructure, cryptocurrency, commodities and collectables)4.99.0
Total100100

Source: SuperConcepts

Several differences stand out:

  • SMSFs have a higher level of cash and short-term deposits, although not massively so.
  • SMSFs hold more Australian shares and property
  • APRA funds hold more international shares and fixed interest, and more alternative assets.

At first glance, these differences conform to the stereotype of SMSFs being too dependent on cash, Australian shares and property.

However, the preference for cash may come down to a higher proportion of SMSF members in pension phase (45 per cent of SMSFs are partly or fully in pension phase according to the ATO). The more members a fund has in pension phase, the more cash and liquid investments it needs to cover benefit payments.

Also, the differences are not so stark when you group assets. For instance, cash and fixed interest combined amount to 22.7 per cent for SMSFs and 27.0 per cent for APRA funds. Similarly, local and international shares (56.4 per cent for SMSFs, 55.5 per cent for APRA funds) and property and other (20.9 per cent vs 17.5 per cent ).

It’s likely that the differences within these broad asset groupings are driven by access to different markets, and SMSF trustees being more comfortable picking investments they know such as local shares and property.

What’s more, while big funds can invest directly in large infrastructure projects with steady capital appreciation and reliable income streams, SMSF investors may be pursuing a similar strategy but with real property instead.


Top 10 SMSF investments

Whether it’s the familiarity factor or ease of access, the top 10 investments by value held by SMSFs in the SuperConcepts survey were all Australian shares. As you might expect, the major banks dominate the top 10, along with market heavyweights BHP, CSL and Telstra.

Another thing the top 10 have in common, apart from being household names and easy to access, is dividends. Just as SMSFs in retirement phase hold higher levels of cash to fund their daily income needs, high dividend paying shares are prized for their regular income stream.


Use of ETFs and managed funds

While SMSFs hold large sums in direct Australian shares, diversification improves markedly when you add investments in Australian and international shares held via ETFs and managed funds.

The SuperConcepts survey found almost one third of SMSF investments by value are held in pooled investments. The highest usage is for international shares and fixed interest, where 75 per cent of exposure is via ETFs and managed funds.

As it’s still relatively difficult to access direct investments in international shares, it’s not surprising that global share funds account for eight of the top 10 ETFs and managed funds.

This latest research shows that the diversification of SMSF investment portfolios is broadly comparable to the big super funds. After 30 years of growth and a new generation taking control of their investments, the SMSF sector has well and truly come of age.

If you would like to discuss your SMSF’s investment strategy or you are thinking of setting up your own fund, give us a call.


i https://www.superconcepts.com.au/insights-and-support/news-and-media/detail/2022/06/19/superconcepts-relaunches-quarterly-smsf-investment-patterns-survey

 

Avoid the rush: Get ready for June 30

It seems like June 30 rolls around quicker every year, so why wait until the last minute to get your finances in order?

With all the disruption and special support measures of the past two years, it’s possible your finances have changed. So it’s a good idea to ensure you’re on track for the upcoming end-of-financial-year (EOFY).

Starting early is essential to make the most of opportunities on offer when it comes to your super and tax affairs.

New limits for super contributions

Annual contribution limits for super rose this financial year, so maximising your super contributions to boost your retirement savings is even more attractive.

From 1 July 2021, most people’s annual concessional contributions cap increased to $27,500 (up from $25,000). This allows you to contribute a bit extra into your super on a before-tax basis, potentially reducing your taxable income.

If you have any unused concessional contribution amounts from previous financial years and your super balance is less than $500,000, you may be able to “carry forward” these amounts to further top up.

Another strategy is to make a personal contribution for which you claim a tax deduction. These contributions count towards your $27,500 cap and were previously available only to the self-employed. To qualify, you must notify your super fund in writing of your intention to claim and receive acknowledgement.

Non-concessional super strategies

If you have some spare cash, it may also be worth taking advantage of the higher non-concessional (after-tax) contributions cap. From 1 July 2021, the general non concessional cap increased to $110,000 annually (up from $100,000).

These contributions can help if you’ve reached your concessional contributions cap, received an inheritance, or have additional personal savings you would like to put into super. If you are aged 67 or older, however, you need to meet the requirements of the work test or work test exemption.

For those under age 67 (previously age 65) at any time during 2021-22, you may be able to use a bring-forward arrangement to make a contribution of up to $330,000 (three years x $110,000).

To take advantage of the bring-forward rule, your total super balance (TSB) must be under the relevant limit on 30 June of the previous year. Depending on your TSB, your personal contribution limit may be less than $330,000, so it’s a good idea to talk to us first.

More super things to think about

If you plan to make tax-effective super contributions through a salary sacrifice arrangement, now is a good time to discuss this with your employer, as the ATO requires documentation prior to commencement.

Another option if you’re aged 65 and over and plan to sell your home is a downsizer contribution. You can contribute up to $300,000 ($600,000 for a couple) from the proceeds without meeting the work test.

And don’t forget contributing into your low-income spouse’s super account could score you a tax offset of up to $540.

Get your SMSF shipshape

If you have your own self-managed super fund (SMSF), it’s important to check it’s in good shape for EOFY and your annual audit.

Administrative tasks such as updating minutes, lodging any transfer balance account reports (TBARs), checking the COVID relief measures (residency, rental, loan repayment and in-house assets), and undertaking the annual market valuation of fund assets should all be started now.

It’s also sensible to review your fund’s investment strategy and whether the fund’s assets remain appropriate.

Know your tax deductions

It’s also worth thinking beyond super for tax savings.

If you’ve been working from home due to COVID-19, you can use the shortcut method to claim 80 cents per hour worked for your running expenses. But make sure you can substantiate your claim.

You also need supporting documents to claim work-related expenses such as car, travel, clothing and self-education. Check whether you qualify for other common expense deductions such as tools, equipment, union fees, the cost of managing your tax affairs, charity donations and income protection premiums.

Review your investment portfolio

After a year of strong investment market performance, now is also a good time to review your investments outside super. Benchmark your portfolio’s performance and check whether any assets need to be sold or purchased to rebalance in line with your strategy.

You might also consider realising any investment losses, as these can be offset against capital gains you made during the year.

If you would like to discuss EOFY strategies and super contributions, call our office on 03 5120 1400.

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.

The new Director ID: Do you need one?

It’s been a busy year for Australia’s two million plus directors dealing with the pandemic and lockdowns and there’s now a new task on their to-do list.

From 1 November 2021, if you’re a director or want to become one, you will need to apply for the new Director Identification Number (Director ID) being rolled out by the Federal Government.

Directors of businesses and entities of all sizes – including directors and corporate trustees of self-managed super funds (SMSFs) – will all need to apply. If you run your business as a sole trader or partnership, however, you won’t need a Director ID.

Director ID: what is it?

The new Director ID is a unique 15-digit identifier most directors will need before they can take up a directorship.

Before you join a board, you will need to apply for your own Director ID which you will keep forever, even if you change boards, stop being a director, change your name or move interstate or overseas.

This new identifier is part of a broader registry modernisation project combining the Australian Business Registry Service (ABRS) with numerous ASIC registers to form a single system overseen by the ATO.

According to the government, unique director identifiers will create a fairer business environment by preventing the use of false and fraudulent director identities.

Who needs a Director ID?

The new regime casts a pretty wide net and will catch most business entities and organisations.

You will need a Director ID if you are an eligible officer of a company, Aboriginal and Torres Strait Islander corporation, corporate trustee, charity or not-for-profit organisations limited by guarantee, or a foreign company registered with ASIC and conducting business in Australia.

Directors of registered Australian bodies (such as incorporated associations registered with ASIC that trade outside the state or territory in which they are incorporated) also need to apply.

If your organisation has an Australian Business Number (ABN), you can use the ABRS LookUp tool to check whether it is registered with ASIC.

Officers outside the ID regime

Some company officers are not required to apply for the new identifier.

If you are a company secretary but not a director, act as an external administrator of a company, or are called a director but haven’t been appointed as a director under the Corporations Act, you won’t need a Director ID.

Neither will directors of charities not registered with ASIC to operate throughout Australia.

The officers of an unincorporated association, cooperative or incorporated association established under state or territory legislation (unless the organisation is also a registered Australian body), are also exempt.

Applying for your Director ID

From November 2021, you will need to apply for your Director ID on the ABRS website and log in using the myGovID app. The myGovID app is downloaded on your smart device to verify your digital identity and is different to your existing myGov account.

When applying for your Director ID, you are required to personally make the application so you can verify your identity.

There are varying application deadlines for the new identifier, with current directors (on or before 31 October 2021), having until 30 November 2022 to obtain their Director ID.

While existing directors have plenty of time, if you become a director between 1 November 2021 and 4 April 2022, you must apply for your Director ID within 28 days of your appointment to the board.

Directors appointed after 5 April 2022, must apply prior to taking up their directorship.

If you are unable to apply for your Director ID by the relevant deadline, you can apply for an extension.

Once you receive your new Director ID, you will need to pass it on to your company recordholder who is usually the company secretary or authorised agent. The ABRS is not permitted to disclose Director IDs to the public without consent and your details won’t be searchable on the register.

If you would like more information about Director IDs, whether you need one and how to go about applying, please get in touch with one of our advisers on 03 5120 1400 or via our website contact page.

Material contained in this publication is a summary only and is based on information believed to be reliable and received from sources within the market. It is not the intention of RGM Financial Planners Pty Ltd ABN 36 419 582 Australian Financial Services Licence Number 229471, RGM Accountants & Advisors Pty Ltd ABN 69 528 723 510 that this publication be used as the primary source of readers’ information but as an adjunct to their own resources and training. No representation is given, warranty made or responsibility taken as to the accuracy, timeliness or completeness of any information or recommendation contained in this publication and RGM and its related bodies corporate will not be liable to the reader in contract or tort (including for negligence) or otherwise for any loss or damage arising as a result of the reader relying on any such information or recommendation (except in so far as any statutory liability cannot be excluded).

Liability limited by a scheme approved under Professional Standards Legislation.