May 2012 Newsletter

In this edition:

Welcome

Super Contributions: What are the rules? (Part 2)

Trustee housekeeping requirements

Changes to the taxation of car fringe benefits

Feature: Death and taxes in Superannuation (Part 2)

Safeguarding your assets post January 2012

>> Read last month's article about non-concessional and concessional contributions, spouse contributions, co-contributions and mandated contributions

The rules governing when different types of contributions can be received by any superannuation fund (including a self managed fund) are all slightly different but they do have one thing in common – they are linked to the age and/or work status of the person for whom they are made.

Before age 65
Until the contributor (or, in the case of spouse contributions, the recipient) is 65:

• anyone can make undeducted contributions;

• employers and individuals who are eligible to claim tax deductions for their super contributions can make taxable contributions;

• spouse contributions are fine (note that it is the age of the spouse rather than the contributor that is important here).

There are limits on the amounts that can be contributed and these are discussed further below. However, there is no requirement that an individual is working in order to have superannuation contributions made on their behalf. Even someone who has been retired for many years and has started a pension in their superannuation fund can still make contributions - there are just some accounting rules about keeping separate records so that the new contributions are recorded separately to the pension account.

After age 65
The situation changes fundamentally after age 65. From that point on, contributions are really only possible for those still working at some point during the financial year. The relevant work test is as follows:

Contributions can be made providing the individual has carried out at least 40 hours of paid work during a 30 day period within the financial year in which the contribution is made.

For example: Jane turned 66 on 1 August 2011. She was therefore over 65 for the whole of 2011/12. During September and October she worked 15 hours per week on a contract basis. During that time, it was possible to find a 30 day period where she carried out more than 40 hours of work. The 30 days doesn't have to be in the same calendar month, it just has to be consecutive.

She could therefore make a contribution any time after that 30 day period (or even during it once she had clocked up 40 hours). There is no specific evidence Jane needs to lodge with the Australian Taxation Office to prove her ability to contribute to her Self Managed Super Fund (although most large funds will require a signed statement to confirm that she has met this work test). That said, it is generally advisable to keep some record such as a time sheet, pay slip etc. Note also that only paid work counts - Jane could not do volunteer work for no reward and meet this test.

The year before (2010/11), Jane turned 65 on 1 August 2010 and therefore different rules applied for the first month of the financial year. She could make contributions at any time in July 2010 without needing to meet a work test. However, from 1 August 2010 she can only make a contribution (or have an employer or spouse make one for her) if she meets the work test during 2010/11 first.

After age 75
Contributions must stop altogether at age 75, even if the individual is still working. 

Actually it's technically slightly more complicated - contributions must stop on the 28th of the month following the individual's 75th birthday. Someone who turns 75 in May, for example, can have contributions made up until 28 June as long as they meet the work test.

Important Exceptions
Superannuation is never completely straightforward! There are always some exceptions (and often even exceptions to the exceptions). In the case of contributions, the exceptions are as follows:

• mandated contributions can be made at any time – in other words if the law requires the contribution it can be made;

• spouse contributions are only allowed up to age 70 (and again, it is the age of the spouse, not the contributor that is relevant here). Even then, the spouse must meet the work test to have contributions made on his/her behalf after age 65;

• there is an overriding exception that a fund can always accept contributions if the trustee is "reasonably satisfied" that they relate to a period during which the trustee could have accepted them. For example, a fund could accept contributions for someone who is over 65 and does not meet the work test if the trustee was satisfied that those contributions related to the period prior to the individual's 65^th birthday; and

• even some things that don't really sound like "contributions" are subject to these rules. For example, sometimes people are able to transfer money from a foreign superannuation fund into an Australian fund. These amounts are technically "contributions" and can therefore only be made if the member is eligible to make contributions at the time. The same applies to rollovers arising from the sale of a small business to avoid capital gains tax (often called a "CGT Exempt" rollover).

What if you break the rules?
If any superannuation fund accepts a contribution it is not allowed to accept, it has broken the superannuation law and must refund the contribution within 30 days.

Often, funds don't realise immediately that they have broken the rules and therefore fail to refund the contribution within that timeframe. Technically, the Australian Taxation Office could then reclassify the fund as a "non complying" fund (which is disastrous - not only would the fund lose all its future tax concessions but it would also be taxed at 45% on most of its existing assets). In fact, it is unlikely that such extreme action would be taken but the fund would certainly have to be reported to the ATO and would need to take steps to rectify the problem. Generally this would mean refunding the contribution to whoever made it.

>>Read the final article in our series in the June 2012 newsletter on contribution limits and the consequences of exceeding those limits

In the meantime, if you have any questions please contact us.