Why June is important for SMSF members

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June is the time when most members of SMSFs check to see whether they have complied with the key superannuation rules and, equally as important, taken full advantage of any concessions on offer.

While this all requires care, there is little doubt that the greatest challenge centres on making sure that, when deciding on last-minute super contributions, you don't exceed the so-called contribution caps.

Graeme Colley, head of technical services with OnePath and a specialist in SMSFs, warns penalties can be extremely harsh if the caps are breached, in some cases effectively resulting in part of your super contributions being taxed at 93%.

superannuation greywater

Changes announced in the recent federal budget will provide some relief for those who breach these caps but only from July 1 onwards. They don't apply to the current financial year.

There are two sets of caps. One applies to so-called concessional contributions that deliver the contributor a tax advantage, either because the contributions are paid out of pre-tax salary or because someone who is self-employed gets a direct tax deduction on contributions. The other set of caps applies to non-concessional contributions, which are simply those paid out of after-tax earnings and which don't generate a tax break.

The risk of inadvertently breaching one or both sets of caps is due, in part, to the complexity of the rules governing super contributions. The cap for concessional contributions is currently $25,000 for those under 50 and $50,000 for those 50 to 74. You can't make any contributions to super if you are 75 or older.

The non-concessional cap is $150,000 a year or $450,000 in any one year if you bring forward two years worth of caps. This option is only open to those aged under 65 at the start of the financial year.

In general, those 65 at the start of 2010-11 can only contribute to super if they have worked to earn income for at least 40 hours over 30 consecutive days.

As for the caps, Colley says to remember that in the case of concessional contributions, both the $25,000 and $50,000 caps include all those you make or which are made on your behalf in 2010-11, including the super guarantee.

This can even affect some of those who are classified as self-employed, since this group is able to get up to 10% of their income from paid employment. If you breach the cap, the minimum penalty is an extra tax impost of 31.5% on the excess. This is in addition to the standard 15% tax charged on all concessional contributions.

If you exceed the non-concessional limit the excess will be hit with tax of 46.5%.

The worst-case scenario is if you exceed both caps. If this happens the excess concessional contributions are reclassified as non-concessional and hit by both sets of penalties. This could see some of your super contributions being taxed at 93%.

Property play

Using your SMSF to gear into property can make good investment sense but the challenge is not just to find the right bit of real estate at the right price but also to comply with the stringent rules that apply.

While this means getting professional advice is essential, in the spirit of self-management anyone running a SMSF should make sure they fully understand what's involved. This is where a new book by Martin Murden, an experienced adviser on self-managed super, can help. Appropriately entitled How to Invest in Property through your Self-Managed Super Fund, it provides an easy-to-understand guide to both whether, and how, to use your SMSF to gear into property.

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Peter Freeman is a former managing editor of The Australian Financial Review. He runs his own self-managed super fund.