What the changes to the contribution rules mean for SMSFs
24 November 2022
Your super fund balance may be the largest investment you hold as part of your retirement planning. And, data from the ATO shows that over 1 million Australians are using a Self-Managed Super Fund (SMSF) to help them grow their retirement nest egg.
One of the primary reasons SMSFs are quickly gaining momentum is the control and flexibility they give you over how you invest your retirement savings. For instance, an SMSF can provide greater death benefits than some public funds, by allowing a more thorough and flexible estate planning. As a business owner or professional, SMSF’S may also help protect your assets against bankruptcy or creditor claims.
Whilst an SMSF encourages trustees to have more control and require an understanding, we suggest working with an SMSF administrator and advisory expert that can assist in your understanding and day to day operations.
Benefits of SMSFs
Investing in an SMSF offers a number of benefits if you are saving towards retirement. These include:
1. A wider range of investment options
SMSFs provide a wider range of investment options compared to other superannuation funds. They allow you to invest in products that are not allowed in public funds, such as property trusts, for residential and commercial real estate, if the investments meet the Sole Purpose Test (providing retirement benefits for members),adhere to the SIS Regulations and the fund's investment strategy. SMSFs that purchase commercial property and may want to lease it to a related party that is their own business may do so which may minimise taxes.
Investments in artwork, jewelry, antiques, coins and banknotes, postage stamps, physical gold and other collectibles are all permitted within an SMSF under strict conditions. Some of the legal requirements are that:
Your Trust Deed and Investment Strategy allow it
Members and related parties should not receive any present-day benefits
The collectibles must not be leased to an SMSF member or a related party
The collectibles should neither be stored nor displayed in an SMSF member's or related party's residence
2. Flexibility and control
As an SMSF member, you must also be a trustee, which means you get a chance to tailor the rules of the SMSF to suit your particular needs and circumstances unlike other superannuation providers. Trustees can make decisions including but not limited to superannuation contributions and death benefits.
3. Effective tax management
Most tax benefits are common to all super funds. For instance, taxes for member contributions and fund earnings for compliant SMSFs in Australia are at a concessional rate of 15% while benefits received past age 60 and when an SMSF is in pension mode are tax free.
Being a trustee and a member means that you are more directly involved with your superannuation investments and performance. In retail or industry super funds, generally investment performance takes months of aggregation before a detailed performance can be provided.
5. Pooling your super with others
From 1 July 2021 the maximum numbers of members for a self-managed superannuation fund was increased from four to six.
SMSFs can either have individual trustees or a corporate trustee where all members are directors of the corporate trustee. Some states and territories restrict the number of trustees a trust can have to less than six, so it is important that you seek professional advice to understand if your fund has been impacted by these restrictions
Important changes to SMSFs from 1 July 2022
From 1 July 2022 the work test was abolished for those wanting to make non-concessional contributions to superannuation. The work test is an annual test requiring SMSF members to be gainfully employed to make super contributions.
Gainful employment means that you have worked at least 40 hours for 30 consecutive days in the financial year in which the contribution is made.
The new rules allow members aged between 67 -75 years to make non-concessional (after-tax) contributions up to the cap of $110,000 per year without meeting a work test or $330,000 under the bring forward rules. Your super balances as at 30 June 2022 must have been less than $1.7million to qualify. The work test still applies if you are a 67-75 year old who wants to claim a tax deduction relating to your personal super contribution.
How changes to the work test impact you
The changes to the work test give 67-74 year-olds an opportunity to make additional super contributions.
Before 1 July 2022 if you were retired and aged 67-74 years, and could not meet the work test you were therefore ineligible to make non-concessional contributions to super. From 1 July 2022, you can make your contributions until the age of 75 as long as your total superannuation balance as at 30 June 2022 was less than $1.7million. Contributions may come from monies outside of super, a sale of an investment held personally, or an inheritance, where previously they may not have been eligible.
Next steps if these changes impact you
If this new legislation has now changed the way you can contribute to super, you may like to consider this strategy.
To work through the specific benefits of an SMSF for you and your beneficiaries, you need an SMSF administration and advisory team with extensive knowledge of SMSF law, tax, and investments. Reach out to a Findex specialist today to see how we can help.