What are Concessional Contributions?
Concessional Contributions are contributions where a tax deduction has been claimed, either by the Member or by an Employer. Concessional Contributions include the following Contribution Types:
Salary Sacrifice Contributions
Personal Contributions where a tax deduction is claimed
Each Concessional Contribution Type is discussed below:
These Contributions are made by your Employer. Employer Contributions are contributions made by an Employer for the benefit of a SMSF Member commonly known as Superannuation Guarantee Contributions (SGC). Typically these contributions are made at 9.5% of your salary income. Your SMSF can accept these Employer Contributions for Members at any time. This means your SMSF may accept them regardless of your age or the number of hours you are working at that time. No documentation is required to be completed if you make Employer Contributions.
Salary Sacrifice Contributions
These Contributions are made by your Employer on instructions from you. Salary Sacrifice Contributions are voluntary superannuation contributions made by an Employer to your SMSF over and above their Superannuation Guarantee or award obligations. These contributions are made to your SMSF instead of to you as an Employee receiving that amount as salary. No documentation is required to be completed if you make Salary Sacrifice Contributions. For more on Salary Sacrifice Contributions click here.
Personal Contributions where a Tax Deduction is claimed
These Contributions are made by you. Voluntary Personal Contributions that you make to your SMSF, where you claim a tax deduction for the contribution in your Personal Tax Return are also Concessional Contributions.
10% Rule - Before 1 July 2017
Before 1 July 2017, you are only allowed to claim a tax deduction for personal contributions if you satisfy the 10% Rule.
The 10% Rule allows you to claim a tax deduction for super contributions if your employment income divided by your assessable income is less than 10%.
Employment income includes salary sacrifice contributions (but not SGC contributions) plus reportable fringe benefits.
Assessable income includes gross income before deductions and includes salary, investment and business income, net capital gains, salary sacrifice contributions plus reportable fringe benefits.
Assume your salary income from employment is $5,000 and your total assessable income from all sources is $100,000 (predominantly from investment income).
You wish to make a personal contribution into your SMSF of $20,000 and claim this amount as a tax deduction. In that case you will divide $5,000 / $100,000.
In this case the result of 5% will be under 10% enabling you to claim a tax deduction for the personal contribution of $20,000.
Alternatively assume your salary income from employment is $100,000 and your total assessable income from all sources is $100,000 (i.e. your salary makes up all your assessable income).
You wish to make a personal contribution into your SMSF of $20,000 and claim this amount as a tax deduction. In that case you will divide $100,000 / $100,000.
The result of 100% will exceed 10%.
This means that you cannot claim a tax deduction for the personal contribution of $20,000 in this example.
Removal of 10% Rule - After 1 July 2017
From 1 July 2017, the 10% rule has been removed. This change will benefit individuals who are partly self-employed and partly salary earners, and individuals whose employers do not offer salary sacrifice.
If you make a personal Concessional Contribution into your SMSF and in turn claim a Tax Deduction on that Contribution in your Personal Tax Return, you will need to complete the following documents.
1. ATO Tax Deduction Form
The contributing member must complete a notice of intent to claim a deduction form on or before whichever of the following days occurs earliest, either:
- the day the member lodges the tax return for the year in which the contributions were made;
- the last day of the financial year after the financial year in which the member made the contributions.
The form can be found here for completion.
2. Confirmation of Receipt & Acceptance of Section 290-170 Notice
The Trustees of the SMSF need to complete the Confirmation of Receipt & Acceptance of Section 290-170 Notice to acknowledge the member’s notice of intent to claim a deduction.
The Notice can be found here for completion.
How to Make a Personal Concessional Contribution
If you are eligible for Personal Concessional Contributions, please follow the steps detailed below to complete the process:
Step One: Make a Contribution to your SMSF
If you wish to make a cash contribution, you simply need to deposit cash into the bank account owned by your SMSF.
If you wish to make "in specie" contributions (i.e. transfer an eligible asset into the SMSF directly instead of cash), please refer to our website here for more information.
Step Two: Complete Documentation and Notify ESUPERFUND
You will be asked to confirm on whose behalf the contributions have been made and the Contribution Type using an annual checklist we send to all SMSF clients each year in July. You may refer to this link for further details regarding the annual compliance process.
To enable ESUPERFUND to report the contribution type correctly in the SMSF Tax Return, please select the correct contribution type – “Personal Contribution – Concessional” when completing the annual checklist.
Based on the contribution type, we will collect the ATO Tax Deduction Form and the Confirmation of Receipt & Acceptance of Section 290-170 Notice as part of the checklist completion process.
Step Three: Claim a Tax Deduction in the Personal Tax Return
The last step is to claim a Tax Deduction on that Contribution in your Personal Tax Return. You need to contact your personal tax accountant for the process. If you do not have a personal tax accountant, you may contact the ATO directly should you need any assistance in lodging your Personal Tax Return.
Work Test Requirement to make a Concessional Contribution
If you are aged between 65 and 74 you must pass a Work Test in order to make a Concessional Contribution into your SMSF.
Passing the Work Test when Over 65
The "Work Test" requires that an Individual is "Gainfully Employed" for at least 40 hours in a period of not more than 30 consecutive days in that Financial Year. The term "Gainfully Employed" is defined to mean employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. Gain or reward essentially means that you are remunerated in return for the personal services provided. (e.g. as a salary, business income, bonuses and commissions that are fully documented and declared for tax purposes). It does not include passive investment income (e.g. rental income or dividend income). In addition, volunteers are generally not considered to be gainfully employed as they do not receive remuneration for their services. You should also take care if you involve family and friends in an attempt to satisfy the definition of 'gainful employment'. If you assist another family member by say, babysitting or gardening, the particular circumstances surrounding the arrangement will be critical. For example, if you look after your grandchildren while their parents are on holiday, it is likely that your motive for doing so would be for personal or domestic reasons rather than to derive financial gain as per a normal employer / employee arrangement. In this case, even if you are paid for your services, the definition of gainful employment may not be satisfied.
What happens if you contribute without passing the Work Test?
If you are aged between 65 and 74 and contribute to your SMSF without first meeting the work test, the amount must be returned to you by your SMSF within 30 days. If the 'ineligible' amounts are not returned within this time, your SMSF will have breached the superannuation contribution rules resulting in compliance issues.
Maximum Concessional Contributions Allowed
If you are aged between 65 and 74 the Concessional Contribution limit applicable for a given Financial Year is as follows. The limits apply to the total of your Employer, Salary Sacrifice and Personal Concessional Contributions.
||Concessional Contributions cap per member per annum
||$25,000 per member per annum
||$35,000 per member per annum
||$35,000 per member per annum
Additional to Non Concessional Contributions
The limits detailed above are in addition to any Non Concessional Contributions that you are permitted to make into your SMSF.
Tax on Concessional Contributions
Tax is payable on Concessional Contributions made into a SMSF at the rate of 15%.
Additional 15% tax on Concessional Contributions for high-income earners
Those earning more than $250,000 a year will have their Concessional Contributions taxed at 30% rather than the standard 15%. The definition of 'income' is: Taxable income + concessional contributions + adjusted fringe benefits + total net investment losses.
Importantly Concessional Contributions (i.e. your employer's contribution, salary sacrifice contributions and contributions by a self-employed person claiming a tax deduction) will count as income. For example, if your taxable income is $280,000 and your employer makes $25,000 in concessional contributions, you will trigger the threshold because your income will be assessed as $305,000 (i.e. $280,000 + $25,000 = $305,000). The additional tax of 15% (30% in total) will apply to those concessional contributions that take your income over $250,000, which in this case is on the extra $55,000.
More importantly, income includes investment losses including losses on borrowing money to buy shares or from negatively geared property. For example assume your taxable income is $200,000, which has been calculated after deducting a net $90,000 loss on investment properties. You also receive $10,000 in fringe benefits, and your employer makes super contributions of $18,000. Under the rules, your income is $318,000. This is $68,000 above the $250,000 income trigger, which means your concessional contributions will now be taxed at 30% instead of 15%.
Low income earners won't pay contributions tax
Effectively, a person whose income is less than $37,000 will have the contributions tax on concessional contributions returned to their Fund, meaning they won't pay any contributions tax. Worth a maximum of $500, the Australian Taxation Office (ATO) will pay the Low Income Superannuation Tax offset refund to the SMSF. Like the co-contribution, a key eligibility requirement is that at least 10% of the person's income must come from employment.
All Concessional Contributions are made to the Transaction Bank Account
All Concessional Contributions made by each Member of the SMSF must be deposited into the Transaction Bank Account established for your SMSF. There is only one Transaction Bank Account established for your SMSF and all Members must deposit Contributions into the same Transaction Bank Account. It is unnecessary and administratively inefficient to have a separate Transaction Bank Account for each Member.
How ESUPERFUND tracks Concessional Contributions
Each Contribution and Contribution Type must be allocated to a specific Member as part of the annual compliance process. This is a legal requirement. Typically the Member making the Contribution and the Contribution Type will be detailed on the Bank Statement. To the extent that the narration on the Bank Statement is insufficient, you will be asked to confirm on whose behalf the contributions have been made and the Contribution Type using an annual checklist we send to all SMSF clients each year in July. You do not need to send us confirmation at the time each Concessional Contribution is made. This information is only required annually and we will guide you through the process and prompt you when information is required from you. For more visit our Q&A section here.
Excess Concessional Contributions
If you exceed your Concessional Contribution Limit, the Excess Contributions over the Concessional Contribution Limit will be taxed at your actual marginal tax rate, plus an interest charge calculated by the ATO (as would happen for income tax paid late to the ATO), rather than the top marginal tax rate.
If you're already on the top marginal tax rate, you only need to pay the interest charge.
To avoid the above disastrous situation, it is vital that you keep track of all your Concessional Contributions, noting that Contributions are regarded as being paid at the time they are received by the fund.
Catch up concessional Contributions
From 1 July 2018, you will be able to make 'carry-forward' concessional super contributions if you have a total superannuation balance of less than $500,000 at 30 June of the previous Financial Year and you meet the work test.
If you are eligible, you will be able to access your unused concessional contributions cap space on a rolling basis for five years.
Amounts carried forward that have not been used after five years will expire.
Only unused amounts accrued from 1 July 2018 can be carried forward.
This means the first year in which you can access unused concessional contributions is the 2019-20 financial year.
This increased flexibility will make it easier for people with varying capacity to save and for those with interrupted work patterns, to save for retirement and benefit from the tax concessions to the same extent as those with regular income.