The easiest way of building your SMSF nest egg is by making as many contributions as you can. There are some contributions that allow you to claim an income tax deduction or a tax offset to reduce the tax you need to pay on your income. But first let’s have a look at how to make contributions into your SMSF.
Firstly, you need to make sure you do not exceed the contributions caps of $25,000 per annum for concessional contributions and $100,000 per annum or $300,000 (using the two year bring forward caps) for non-concessional contributions. This is because if you exceed these caps, you will end up having to pay more tax. There are ways, however, you can contribute more than the annual cap amounts.
Secondly, you need to be aware of the Tax Office’s interpretation of when a contribution is considered to be made into an SMSF. This is because the Tax Office may treat certain actions of an SMSF member as being contributions without the member realising it. For example, when a member pays an expense belonging to their SMSF and does not seek reimbursement, the Tax Office may regard that as a contribution.
Thirdly, you need to consider the timing of the contribution. The timing will determine in which financial year the contribution is counted against the contributions caps, as well as which year you can claim a tax deduction or a tax offset on the contribution.
Remember also that if you are aged 65 or over, you need to meet the part time work test (i.e. 40 hours over 30 consecutive days) in order to make contributions into your SMSF. If you are making non-concessional contributions, then your total superannuation balance across all your superannuation funds must be below $1.6 million.
Now that we know how to make contributions, let’s now look at how we can maximise the benefits of them.
When making concessional contributions, you could consider contributing $25,000 during the financial year and another $25,000 in June of the same financial year so that you can claim a tax deduction on the entire $50,000 in one financial year. From 1 July 2019, you may be able to claim a higher amount as a tax deduction by using the catch up concessional contribution caps.
In the event you receive a structured settlement payment for a personal injury, you could consider contributing the payment into your SMSF. The structured settlement contribution will not count towards your non-concessional contributions cap. It will also not count towards the $1.6 million transfer balance cap, if you decide to use the payment to commence a retirement pension in your SMSF.
Some of us own small businesses and another way to create wealth in an SMSF is to transfer your business property into your SMSF. If you qualify as a small business entity where your business turnover is less than $2 million or your net asset value does not exceed $6 million, then not only can you avoid paying capital gains tax on the sale of the property, you may be able to contribute either the sale proceeds of up to $1,480,000 or capital gains of up to $500,000 into your SMSF if you qualify. The contribution will not count towards your non-concessional contributions cap.
You can also help your spouse with their super and claim a tax offset by making contributions for them. Your spouse will need to meet certain eligibility criteria in order to receive spouse contributions. This includes an annual income not exceeding $37,000 per annum.
If your total income is less than $52,697, you may be entitled to receive government co-contributions of 50 cents for each $1 of up to $1000 in non-concessional contributions made into your SMSF. The maximum co-contribution of $500 reduces as your income exceeds $51,813 and cuts out altogether once your income reaches $52,697.
By having a good understanding of the income tax and superannuation laws, you can maximise the use of your SMSF to build your nest egg for your retirement.
Monica Rule is an SMSF specialist and author. Her advice is general in nature and you should seek advice that relates to your specific circumstances before making any decisions. www.monicarule.com.au