Mistakes by SMSF trustees are not common but they do occur from time to time, and it generally involves withdrawing monies by accident or making too much in contributions by accident.
The latter is very important because it can result in contribution caps being exceeded and whether or not the member takes action to resolve the matter has implications for their current and future contributions caps.
So, what is the best practice if one accidentally contribute too much into their fund? Let’s start from the beginning.
What are the contribution caps for 2024-25?
Both the concessional and non-concessional contribution caps were increased from 1 July 2024 to:
Can the SMSF trustee just refund the monies back to the members as if the error didn’t occur?
Generally speaking no – with one major exception!
The SMSF trustee can no longer reject contributions anymore based on amounts – it’s the age of the member that dictates whether they can accept a contribution. If the SMSF was not allowed to accept the contribution in the first place due to the age of the member then they can refund the contribution.
Members aged 75 years old or 75 years plus 28 days in the month following – contribution rejection
The only time that Trustees could refund the contribution is if there has been a breach of SISR 7.04. That is, the contribution can’t be accepted in the first place. This only applies to members that do not meet the age 75 deadline of 28 days in the month following their 75th birthday. The return of the contribution back to the member should occur at the earliest opportunity after the error is identified.
If the contribution is not repaid under the above scenario, any contributions made in excess of the applicable contribution cap will result in either an excess concessional or non-concessional contribution.
All other members – excess contributions assessment applies
If you do not fall under the contribution rejection due to age discussed above, then the excess contributions assessment applies.
Excess concessional contributions
If you exceed your Concessional Contributions Cap in a financial year the ATO will issue an:
- Excess Concessional Contributions Determination notice;
- Excess Concessional Contributions Election form; and
- Amended (Personal) Income Tax Return Notice of Assessment.
The excess concessional contributions will be included in your assessable income and taxed at your marginal tax rate less a 15% tax offset.
Then the two options for dealing with the excess contribution and funding the tax payable are:
- withdraw up to 85% of the excess concessional contributions from the SMSF using the election form; or
- leave the excess concessional contributions in the SMSF.
Depending on your personal circumstances, taking Option A and making the election to release the excess concessional contributions may be the preferred course of action so that the non-concessional contribution cap is unaffected.
Excess non concessional contributions
Similarly, if you exceed your Non Concessional Contributions Cap in a financial year the ATO will issue an Excess Non Concessional Contributions Determination notice outlining the excess, the associated earnings amount and the total release amount. Then there are two options to deal with the excess and the related tax as follows:
- withdraw the total release amount including the excess non concessional contributions from the SMSF (in this case you will only bear tax at marginal rates (less 15% tax offset) in personal hands on the earnings made on the contribution while in the fund); or
- leave the excess concessional contributions in the SMSF and be taxed on them in the fund at 47%
Tips & traps
Care must be taken to ensure the member makes a valid election nominating the SMSF to release their excess contributions and that they wait for the ATO to issue the release authority to the SMSF before any payment is made from fund. If this is not done in the correct order, then the member may be deemed to have illegal early access to their super.
How about failure to meet the work test for members aged 67 to 74 and personal concessional contributions?
The work test (ie. gainfully employed for least 40 hours over 30 consecutive days) will only apply if an individual is aged between 67 and 74 and they wish to claim a tax deduction for the voluntary contributions they make into the SMSF (ie. personal concessional contributions). This test can be met at any time in the financial year. If an individual is turning 75 in the year they wish to make a personal concessional contribution, in addition to meeting the work test, they need to make the contribution no later than 28 days in the month following their 75th birthday.
Should it turn out that the work test was not met then the personal concessional contribution cannot be claimed, and it is treated as a non concessional contribution. Depending on the member’s previous non concessional contribution history, this may trigger excess non concessional contributions.
As always, if you have any questions in relation to the above, please do not hesitate to reach out and contact us.
Author: Anna Wong – Senior SMSF Manager at Premier SMSF Solutions
*Correct as of 29 August 2024
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
