Eight things you need to know to get your SMSF ready for the end of financial year

As 1 July fast approaches, we take a look at how you can make the most of your self-managed super fund before the end of the financial year and how you can avoid being hit with a penalty from the tax man.

1. Be aware contribution caps are changing

On 1 July, the Australian Tax Office is changing the amount you’re allowed to contribute to your SMSF and the age you’re allowed to do it, for both concessional and non-concessional contributions.

Kathy Evans, principal of superannuation and SMSF at Crowe Horwath, said concessional contributions, or deductable contributions, are employer contributions that include those made under a salary sacrifice arrangement. For people who are self-employed, it includes personal contributions claimed as a tax deduction.

“At the moment with concessional contributions, anyone aged under 60 can currently put in up to $25,000 per annum, while those over 60 can put in $35,000,” says Evans.

She says the ATO is bringing the contribution age down to 50 for the next financial year (2014-15).

Evans says if you’re in that category, from 1 July your contributions cap will go up to $35,000. For those under 50, the cap goes up from $25,000 to $30,000.

Non-concessional contributions are personal contributions that you don't claim as an income tax deduction, and Evans says they will also go up from 1 July.

“Non-concessional and non-deductive contributions at the moment are capped at $150,000 per annum for everyone who’s eligible to make them,” says Evans. “That $150,000 is going up to $180,000 from 1 July.”

2. The superannuation guarantee rate is also going up

Currently, employers must pay a minimum of 9.25% super guarantee to SMSFs. From 1 July, the rate will increase to 9.50%.

Brad Twentyman, director of superannuation at Pitcher Partners, said that rise has the potential to affect salary sacrifice contribution arrangements.

“You need to factor in that your employer will be obliged to contribute 9.5% instead of 9.25% and with an increased obligation on your employer to contribute, your voluntary component may reduce,” says Twentyman.

Graeme Colley, director of technical and professional standards at the SMSF Professionals’ Association of Australia, said: “If you want to maximise your contributions before 30 June, you need to talk to your accountant or professional adviser to make sure your salary sacrifice agreement with your employer allows the maximum to be salary sacrificed.”

Twentyman says it is also important for employers to note the change in superannuation guarantee, to protect themselves from any possible claims of compensations that may arise from over contributing.

“As an employer, if you’re aware that your employee might contribute above the contribution limits, it would be prudent to point out to the employee that they might want to seek some advice. If they think there’s a problem, employers should get on the front foot,” says Twentyman.

3. Watch out for the new penalty regime from 1 July

There has been a lot of talk about the new powers the ATO will have to penalise those who fall foul of its rules. The new penalty regime will be introduced from 1 July and will apply to breaches that remain outstanding as of 30 June.

“If you’re a trustee of a SMSF, you’ve always had obligations to run your fund the way it should be run or you run the risk of upsetting the ATO,” says Evans. “And they’ve also always had the ability to penalise you. But they haven’t had a regime that’s strong enough to stop some people doing the wrong thing.”

Of the 18,000 SMSF contraventions lodged with the ATO in the last financial year, approximately 50% could have incurred penalties based on the proposed new super laws.

“If you are aware there’s a breach within your SMSF and you’re in the position to fix that breach by 30 June, it’s a good idea to do so,” says Twentyman. “Because if you tick over into 1 July, you will be penalised and you’ll need to go to the ATO with cap in hand.”

These breaches include:

• bank accounts going into overdraft;
• failure to get accounts and returns prepared;
• providing loans to family members from your SMSF;
• investments being made into in-house assets which are not solely for the SMSF;
• SMSF assets not being separated from personal assets;
• taking money from the fund for living; and
• incorrect borrowing structures being established for the purchase of assets by a SMSF.

“These penalties are mainly for the more serious breaches of investment restrictions, but they do also apply to the administrative functions a trustee is expected to complete,” says Evans.

The penalties for many of these breaches have gone up to $10,200 per trustee per transaction, so a SMSF with two trustees would be looking at a potential fine of $20,400. 

The penalty for lodging your SMSF accounts by 30 June has also increased.

“If you haven’t done your 2013-14 accounts by 30 June, there’s a possibility that the ATO will be imposing a penalty on trustees that could be up to $1700,” says Twentyman.

“At the moment the non-lodgement fee is a few hundred dollars, and in fact the ATO will probably be looking to impose that and then they’ll come along and impose this new penalty,” he says.

4. Don’t risk being declared a non-person

Non-lodging SMSFs will be declared a non-person for tax purposes if they’ve been slack with their lodgements.

“If you have a SMSF and you haven’t lodged a tax return for two or more years, they will classify your fund as a non-person,” says Evans.

“That means your fund won’t be able to receive contributions, rollovers or transfers,” she says. “In other words, if you’re in that situation and you’re well behind on your reporting, your fund will effectively stop being able to operate.”

The figure for concessional contributions for people over 60 has been corrected since publication from $30,000 to $35,000.

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5. Remember the ‘bring forward’ rule

With non-concessional contributions, if you are under 65, you can currently put $150,000 in a year to your SMSF, but the ATO also allows you to put in three years at once.

“So you can put in $450,000 in one fell swoop,” says Evans. “Then you just can’t do anything for the next two years.”

From 1 July, the bring forward rule becomes $540,000, or three times the new non-concessional contribution cap of $180,000.

Twentyman says Pitcher Partners are not big advocates of this strategy because in most incidences all it does is give a timing advantage.

“But if your marginal tax rate is going to be significantly less next year than this year, you may look at bringing forward a deduction, but from our experience not that many individuals fall within category,” he says.

6. Don’t exceed your minimum or maximum pension withdrawals

“If you’re on a pension in your super fund, make sure you withdraw your minimum pension that you’re required to take out each year,” says Evans. “In some cases, there’s also a maximum limit you can’t go over.”

Minimum and maximum pensions from SMSFs have to be paid by 30 June if you want to avoid paying tax on them.

“If you don’t pay by 30 June, the risk is the government will take away the tax exemption on the fund and that can be significant, there can be thousands of dollars at risk,” says Twentyman.

Colley says if you are eligible to draw amounts from superannuation, you may be able to defer receiving the amount until after you reach the age of 60, or until a later financial year when you may end up paying a lower rate of tax.

7. Get your trust entitlements paid by 30 June

“A lot of self-managed super funds have investments in trusts and those trusts owe the super funds money,” says Twentyman.

“Generally, it is a good idea for the trust to pay whatever it owes by 30 June because the tax office sometimes likes to view those as loans and that can cause compliance issues,” he says.

8. Employers beware of SuperStream by 2015

The ATO is putting in place a new system that aims to standardise the way employers pay super.

The new SuperStream standard will require all SMSFs to be paid electronically and is coming in gradually over the next few years.

Evans says many employers still lodge their employee’s super by sending checks or banking it at the local bank.

Large and medium-sized employers, or those with 20 or more employees, must complete the implementation of SuperStream by no later than 30 June, 2015.

“If you’re a larger employer, you should have looked out for the SuperStream changes and made arrangements by May 31,” says Colley. Large employers were supposed to get new electronic service numbers to pay their employees electronically by the end of May.

Small employers, or those with 19 or fewer employees, have another year starting from 1 July, 2015 but must complete their implementation no later than 30 June, 2016. 

Small businesses may be eligible to use the Small Business Superannuation Clearing House, which is a free online service provided by the ATO that allows you to pay contributions to a single destination in one simple electronic transaction. 

This article first appeared on SmartCompany.