'Total superannuation balance' is a term all superannuation fund members should understand, especially those people with large balances. It will impact how much a person can contribute into their SMSF, whether they qualify for certain superannuation entitlements, and which method their fund can use to determine tax-exempt income from 1 July 2017.
A member’s total superannuation balance is calculated by adding together their accumulation account balance, retirement pension account balance, and any money rolled into their SMSF that has not been allocated to either their accumulation or retirement accounts, and then subtracting any structured settlement contributions received in their SMSF.
Many articles have been written on the $1.6 million transfer balance cap. This is the total amount an SMSF member can have in their retirement pension account from 1 July 2017. However, a member’s total superannuation balance is equally important, for the following reasons:
- Non-concessional contributions: a member’s total superannuation balance must be below the general transfer balance cap ($1.6 million for 2017/2018) in order to make non-concessional contributions into their SMSF from 1 July 2017. The balance is measured at 30 June of the previous year in which the contribution is made and is tested each financial year. This means a member under the age of 65 will not be able to use any unused portion of their bring-forward non-concessional cap if their total balance is $1.6 million or over. As the limit is tied and indexed to the general transfer balance cap, it will increase over time.
- Spouse contribution tax offset: A spouse can claim a tax offset of up to $540 for making up to $3,000 in non-concessional contributions for their low-income spouse. This is provided the low-income spouse’s total superannuation balance does not exceed the general transfer balance cap of $1.6 million and their total non-concessional contributions received in the relevant financial year do not exceed the $100,000 annual limit. The low-income spouse must also be under the age of 70 and meet the part-time work test (i.e. 40 hours over 30 consecutive days) if aged 65 to 69, both the contributing spouse and the low-income spouse must be Australian residents for income tax purposes and not be living apart on a permanent basis at the time the contribution is made. The income threshold for the low-income spouse must not exceed $40,000 from 1 July 2017.
- Catch-up concessional contributions: The new law allows any unused concessional contributions (the annual cap will be $25,000) from 1 July 2018 to be carried forward for up to five consecutive years. This is provided the member’s total superannuation balance is less than $500,000. Only unused amounts accrued after 1 July 2018 will be eligible. Amounts carried forward that have not been used after five years will expire. It is important that members maintain accurate records of contributions made into their SMSF.
- Superannuation co-contributions: In order to be eligible for up to $500 of the Government’s superannuation co-contribution, from 1 July 2017 a member’s total superannuation balance must be less than the transfer balance cap on 30 June of the year before the relevant financial year. The member must also not have contributed more than the $100,000 non-concessional contributions cap, their total income must be below the higher income threshold (i.e. $51,021 for 2016/2017), and 10% of their total income must be from employment related activities, carrying on a business or a combination of both.
- Segregated assets method: From 1 July 2017, SMSFs will no longer be permitted to apply the segregated assets method to determine their tax-exempt income if any member has more than a $1.6 million superannuation balance and the member is in pension phase.
SMSF members must understand how their entitlements will be affected under the new ‘total superannuation balance’ concept to not only avoid penalties but to also take advantage of opportunities to accumulate more for their retirement savings.
Monica Rule is an SMSF Specialist and author of 'The Self Managed Super Handbook – Superannuation Law for SMSFs in Plain English', see www.monicarule.com.au