SIS Contribution Rules

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If you want your SMSF to enjoy concessional tax treatment, make sure it complies with the SIS contribution rules. 

SIS Contribution Rules

The SIS contribution rules tell you what contributions your SMSF can or can’t accept. If you fall foul of these rules, the penalties are tough. Your entire fund will loose its concessional tax treatment. Not just a specific transaction but the entire fund. So it is important to get this right.

When it comes to contributions into super funds, there are two hurdles to take. Two sets of rules to comply with. The SIS contribution rules and then the tax contribution rules.

SIS Contribution Rules

The SIS contribution rules are about whether the fund is even allowed to accept a specific contribution. Reg 7.04 SIS Regulations will tell you that.

Any contributions that don’t meet the conditions of Reg 7.04 need to go back to where they came from. If they don’t, all hell will break lose. Your entire SMSF will loose its concessional tax treatment with all fund income taxed at the top marginal rate.

Only if a contribution has passed this first hurdle – the fund is allowed to accept it – do you even need to worry about the tax contribution rules.

Tax Contribution Rules

The tax contribution rules – the second set of rules – sit in ITAA97. These rules will tell you how to treat a contribution for tax purposes, once it has been accepted. Any contributions that exceed the caps, work tests and age limits in ITAA97 are likely to trigger additional tax.

But these rules are a lot more gentle. Penalties will only affect the specific contribution at your marginal tax rate. Not your entire fund at the top marginal tax rate. Big difference.

So in this article let’s focus on the tough ones – the SIS contributions rules Which contributions is your SMSF allowed to even accept? What are acceptable super contributions per reg 7.04 SIS Regulations?

Reg 7.04

Reg 7.04 lists what contributions a super fund can and can’t accept. It is very black and white. A contribution is either ok or it is not ok. If a contribution doesn’t meet the conditions set out in reg 7.04, the contribution needs to go back to where it came from.

Compliance with reg 7.04 means that your SMSF maintains its status as a complying super fund and concessional tax treatment. It means your SMSF doesn’t have to tax all income at the top marginal rate. So making sure you comply with reg 7.04 is worth the effort.

Mandated Employer Contributions

No matter your age, your super fund must accept any mandated employer contributions. For this you can thank Dr Ken Henry who led the Henry tax review published in 2010.

Mandated employer contributions are defined in reg 5.01 (1). Usually they just include the 9.5% superannuation guarantee (SG) payments your employer has to pay. But sometimes your employer also has to pay you super through an award or agreement. Your fund has to accept all of these as mandated employer contributions.

SuperStream is to better capture and track mandated employer contributions.

Voluntary Contributions

In addition to mandated employer contributions, your super fund might receive voluntary contributions. Your employer might voluntarily pay you additional super. Or you personally make member contributions as defined in reg 5.01 (1).

This is where it gets tricky. Whether your super fund has permission to receive these contributions depends on your age and employment status. Beside that make sure your fund has your tax file number (TFN), since it can only accept your member contributions per 7.04(2) SIS Regulations, if it does.

Under 65

As long as you are under 65 as of 1 July of the relevant financial year, all this is easy. Your super fund can accept any concessional contributions. It can also accept any non-concessional contributions within the 3-year-bring-forward rule.

Per SIS reg 7.04 (3) your fund can accept non-concessional contributions up to three times the non-concessional contributions cap per s292 -85(2) ITAA97 and reg 7.04 (7) SIS Regulations, but not more. This is the 3-year-bring-forward-rule. The current non-concessional contributions gap is $100,000, so the three-year-forward rule allows contributions of up to $300,000 over a period of three years.

65 to 75

Between 65 to 75 voluntary contributions get more tricky. Still possible, but trickier. And when we say 75, we mean 28 days past the month you turn 75.

Your fund can only accept additional contributions if you are gainfully employed on at least a part-time basis during the financial year in which the contributions are made. The three-year-bring-forward rule no longer applies, so non-concessional contributions are limited to $100,000 per year.

You are “gainfully employed on a part-time basis during a financial year” per reg 7.01(3) SIS Regulations if your are gainfully employed for at least 40 hours in a period of not more that 30 consecutive days in that financial year. This roughly equals to 10 hours per week.

75 and Older

Once you have passed the 28th day of the month that follows the month you turned 75, the door is closed. No more additional contributions. Any additional super paid into your fund needs to go back to where it came from.

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So this is what the SIS contribution rules are about. If you get stuck, please just email or call. There might be a simple solution to your problem.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Super Contributions

Super Contributions

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You can contribute to your super – but how much and when depends.  Super contributions come with a lot of strings attached.

Super Contributions

There are three ways to grow your super:

1 – Contributions;
2 – Investment income;
3 – Transfers from another super account.

Investment income and transfers are relatively straight forward. They are what they are. Just make sure the investment income is at-arm’s-length.

But contributions come with a lot of ifs and whens. There is a mandatory and a voluntary part. Contributions are either concessional or non-concessional. And there are caps, work-tests and age limits.

Mandatory Contributions

It is mandatory for your employer to make minimum superannuation contributions on your behalf whenever they pay you $450 or more (before tax) in a calendar month. This is the superannuation guarantee (SG).

And it applies to all adult employees – full-time, part-time or casual – no matter your age with two exceptions.  While under 18, you must work more than 30 hours per week in addition to the $450 before you qualify. The same applies if you work in a domestic setting, for example as a cleaner or nanny.

The current SG rate is 9.5% but set to increase by 0.5% increments until it hits 12% from 1 July 2025 onwards.

Your employer has to pay 9.5% of what you usually earn each month, so your salary for your usual hours of work plus anything extra you usually get – for example commission, bonus, shift loadings or allowances. The official term is ordinary times earnings (OTE). Your OTE doesn’t include overtime.

Your SG entitlement is capped at $5,250.65 per quarter for 2019/20, equivalent to an OTE of $55,270. This is the maximum super contribution base (MSCB). Even if you earn significantly more, your employer only has to pay super up to the MSCB.

If your employer doesn’t pay your SG on time, they have to pay the superannuation guarantee charge (SGC) which consists of your SG payments plus penalties and interest.

Your employer’s SG payments count as a concessional contribution and so trigger a 15% contribution tax upon arrival in your super fund.

Voluntary Contributions

In addition to your employer’s SG payments, you can make additional contributions into super. You don’t have to, but you can. Voluntary contributions are also referred to as personal contributions.

They can be in cash or in-specie. A cash contribution is just a bank transfer. An in-specie contribution is when you transfer ownership of an asset. In-specie contributions are usually limited to SMSFs. Government, industry and retail funds are unlikely to accept in-specie contributions. 

Once you hit 65, you can only make voluntary contributions, if you work at least 10 hours per week, averaged over 30 consecutive days. So over 30 consecutive days you must work at least 40 hours. This is the dreaded super work test.

Once you hit 75, you can’t make any more voluntary contributions – even if you pass the work test – apart from the down-sizer contributions. 

Voluntary contributions are either concessional or non-concessional contributions.

Concessional Contributions

You can contribute up to $25,000 each year before-tax. Before-tax means that somebody claims a tax deduction, either you or your employer. This is called a concessional contribution.

Your employer’s SG payments count towards this cap, but you can use up any remaining cap space with additional personal contributions and claim a tax deduction. If you don’t use up the cap space in one year, you can use it over the following five years as long as your TSB is below $500,000.

Any concessional contributions will trigger a 15% contribution tax upon arrival within your super fund. If your total income plus super contributions exceed $250,000, then your concessional contributions will trigger an additional 15% Div 293 tax.

Non-Concessional Contributions

You can contribute up to $100,000 each year after-tax. After-tax means that neither you nor your employer claim a tax deduction, so this is called a non-concessional contribution.

Spouse contributions you receive count as non-concessional since they trigger a tax offset but not a tax deduction as such.

If you want, you can contribute 3-years’ worth of contributions in one hit. So instead of contributing $100,000 each year, you could contribute more in one year and then contribute less in the following two years, so that all up you don’t contribute more than $300,000 over 3 years.

Once your total superannuation balance (TSB) – so everything you have in super – hits $1.6m, you can’t make any more non-concessional contributions.

Non-concessional contributions don’t trigger any tax upon arrival in your super funds. 

So this is a short overview of what you can contribution when and how. If you get stuck, please call or email us. There might be a simple answer to your query.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

superannuation

Superannuation

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Superannuation is for your retirement. You pay less tax to save more for later.

Superannuation

When you are old and no longer work, you hopefully have enough savings, superannuation or the age pension to live comfortably. But will you?

Saving for your retirement is tough – low wage growth, high marginal tax rates, HELP/HECS debt, mortgage, young kids, you name it – and so you probably won’t get far with this one.

Qualifying for the age pension is also tough and likely to get worse, since our current system is not financially sustainable for generations to come.

And so that means your super is all you will have left – unless you want to rely on family and friends, charity and welfare or crime and begging.

That is a lot of heavy lifting for your super to do. And so there are tax concessions to help you.

Less Tax

Your super comes with three tax concessions. You pay 15% tax on any income within super while in accumulation, 0% tax within super while in pension and 0% tax when you cash your super past 60 or 65 years of age.

This is what super is about. If these tax concessions didn’t exist, very few would consider contributing more than they absolutely have to.

Super Rules

Super comes with nice tax concessions, but also with not-so-nice strings attached. Especially four areas have the legislator’s full attention. How much goes into your super. What happens inside. How much moves into pension mode. And how much comes out. 

How Much Goes In

What goes into your super is called a contribution. There is a mandatory and a voluntary part. The mandatory part affects your employer. The voluntary part just you. 

It is mandatory for your employer to pay a superannuation guarantee (SG) on your behalf whenever they pay you $450 or more (before tax) in a calendar month. The current SG rate of 9.5% is applied to your ordinary earnings capped at the maximum super contribution base, which is $55,270 per quarter in 2019/20. These payments count as concessional contributions.

In addition to your employer’s SG payments, you can voluntarily make additional contributions into super (before-tax or after-tax) as long as you are below 65. Between 65 and 75 you can make voluntary contributions if you work at least 10 hours per week. 

Before-tax means that somebody receives a tax deduction – this is called a concessional contribution. Your concessional contribution is capped at $25,000 per year and triggers 15% or 30% tax upon arrival in your super fund.

After-tax means no tax deduction – so this is a non-concessional contribution. Your non-concessional contribution is capped at $100,000 per year and only possible while your superannuation balance (TSB) – so everything you have in super – is below $1.6m. Non-concessional contributions don’t trigger any tax upon arrival in your super fund.

What Happens Inside

What happens inside is all about investment rules. Your super is yours but you can’t do with it whatever you want. There are six rules that are to protect your super – from you and your Part 8 associates. They are especially relevant for self-managed super funds (SMSF) since an SMSF gives you plenty of opportunity for chummy deals with your mates.

You must pass the sole purpose test and act at arm’s length. You must keep in-house assets below 5% of total assets.  And you must neither acquire assets from related parties, nor acquire or hold assets for personal use, nor borrow money unless it is through a limited recourse borrowing arrangement (LRBA).

How Much Moves Into Pension Mode

How much moves into pension mode is all about transfer balance accounts and caps. Since funds in pension mode enjoy 0% tax, there is a cap on how much you can move into pension mode. That cap is $1.6m at the moment, but will increase with time.

What Comes Out

And how much comes out is all about conditions of release and benefit payments. The big draw-back of super is that you can’t access it for a very long time, usually until you hit 60 or 65. There are ways to access it earlier but those will cost you a fair bit of tax.

Super Fund

Your super is for your retirement. To keep it safe over all those years, it needs to go into a separate entity – a superannuation fund, also called a super fund.

You can join a government, industry or retail fund. Or you can set up your own superannuation fund – called a self-managed superannuation fund (SMSF).

A super fund consists of trustees and members. Trustees mange the fund and are the legal owners of any super assets, but hold these on behalf of members. 

In an SMSF, you as the member are also a trustee – either an individual trustee or a director of the corporate trustee.

And so this is a very short overview of superannuation. Super is a complex topic and a highly regulated area. Please call or email us if you get stuck. There might be a simple answer to your question.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

minor benefit rule

Minor Benefit Rule

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The minor benefit rule is the one exception that turns a non-deductible contribution into a deductible one. 

Minor Benefit Rule

When you make a donation and you pay way more than the minor benefit you get back, then you obviously did this to support the charity. And that should be rewarded through a tax deduction. This is the essence of the minor benefit rule.

The tricky point is what makes a benefit a minor benefit. What means minor? That is the point the entire rule evolves around.

Recap

Here is a quick recap in case you haven’t read Tax Deductible Donation.

A donation is either a gift or a contribution. A gift is tax deductible if it meets the six conditions listed in s30-15 ITAA97 and TR 2005/13.

A contribution is usually not tax deductible, but there are two exceptions – the general deduction in s8-1 ITAA97 and the minor benefit rule. 

The general deduction in s8-1 (1) ITAA97 allows you to claim a tax deduction whenever you pay for something to gain assessable income. To get brand exposure or to buy donor data for example.

The minor benefit rule in s30-15 ITAA97 allows you to claim a tax deduction for a contribution if your contribution qualifies as a tax deductible gift without being a gift and – in addition – meets five other conditions.

Minor Benefit Rule

For your contribution to be tax-deductible after all, it needs to pass two tests. It needs to pass the test for a tax deductible gift. That is the first test. Let’s call it the gift test.

But instead of being a gift – the first condition for being a tax-deductible gift – it needs to pass the additional five conditions of the minor benefit rule. This is the second test.

Gift Test

The contribution needs to be LIKE a tax-deductible gift …apart from the fact that it isn’t a gift. So it must meet all the conditions a gift has to meet per s30-15 ITAA97 and TR 2005/13, except the first one about receiving nothing in return. Roughly speaking, a gift is tax deductible if it meets the following conditions. It must be

1 – a gift – skip this one – a contribution fails this one by definition;
2 – of money or property;
3 – of sufficient value;
4 – made voluntarily;
5 – with a tax receipt;
6 – to a recipient with DGR status.

This is the first test.

Minor Benefit Rule

The second test is passing the minor benefit rule. To pass the minor benefit rule:

1 – You must be an individual and not a company, trust or partnership.
2 – The event must be a fundraising event or charity auction.
3 – If you claim the price of a ticket, you can only claim up to two tickets.
4 – You must only receive a minor benefit in return for your contribution.
5 – The relevant charity must run less than 15 events of this type per year.

Minor 

The core essence of the minor benefit rule is that the benefit you receive is only…MINOR. The thinking is that if you get way less than you paid for, then you must have done this to support the charity. And that should be rewarded with a tax deduction. 

But what is a minor benefit? A benefit is minor if it is worth $150 or less and you pay at least 5 times more than what it is worth. So there are two criteria – market value and payment.

Market Value

The market value of the benefit must be $150 or less. 

This is important. It means that whenever you buy something at a charity auction worth more than $150, the auction item won’t qualify as a minor benefit. The same applies to the tickets for a fundraising event. If it is worth more than $150, no minor benefit.

But remember this is not about what you actually pay for the ticket or item. It is about what it is worth – the market value of your ticket to the event. And the market value of the auction item you successfully bid for.

Payment

You must pay at least 5 times more than its market value.

And this is just as important. It means that if the venue charges $100 per head, then you must pay at least $500 for the ticket for it to qualify as a minor benefit. And if an auction item is worth $50, you must pay at least $250 for it.

The argument is that if you pay 5 times more for what it is worth, you clearly pay the money for other reasons than the benefit you get back. Your intentions are clearly altruistic.

How To Determine Market Value 

A benefit is worth its market value, which is what you would have had to pay for the same good, service or event on the open market. And if there is nothing else like this, then a similar or comparable good, service or event (price or market comparison).

And if it is impossible to make a reasonable price or market comparison, then the market value is assessed based on cost. Take the actual cost plus notional costs plus a certain profit margin and you get the market value (cost-based approach). 

So the value of a benefit is assessed based on market value or cost. Since it is the charity issuing the receipt, they are the ones that need to ultimately work this out. 

Subsidised Benefits

What happens if some benefits are subsidised and the charity didn’t actually pay for these? Makes no difference. Any benefit is assessed based on its market value or cost, even if part or all of the benefit was actually subsidised by another donor.

Let’s say a donor picked up the tap at the charity Gala dinner. So the charity only had to pay $50 per meal, but not the additional $60 per head for free drinks. What is the market value of the benefit received? The answer is $110.

Or another donor donated a range of items for the charity auction. The minor benefit rule still uses the actual market value, despite the fact that the charity paid nothing for these items.

Even if everything was donated – venue, meals, drinks, MC and auction items – it would still be the market value of all this that would go into the calculation. The fact that the charity didn’t pay for some of the benefit doesn’t change the market value or notional cost of that benefit.

Free Event

What happens if attendees don’t pay for the ticket to attend and are just asked for a donation, which they are free to make or not?  Then the entire payment is a donation and hence tax deductible as such. In this case you don’t need to worry about the minor benefit rule.

Splitting

The charity can’t split the ticket into event and gift. It can’t say $150 of the ticket is for the Gala dinner and the other $350 are a gift. Para 149 in TR 2005/13 is very clear on that one,

Para 149: Where DGRs conduct fundraising events such as celebrity dinners, gala events, $1,000-a-plate dinners, and so on, the price of a ticket cannot be notionally split between the value of the material benefit received, that is, the meal, and the amount which represents a gift. Where attendees are to pay a given sum of money in order to attend a function, no part of that sum can be considered a gift. This is so even where the cost of attendance is well in excess of the value of the meal received.

But the charity can charge the meal at market value and then ask for a donation. Para 151 in TR 2005/13 even suggests that,

Para 151: However, a fundraiser can offer tickets to a function for an amount which approximates its market value, and solicit additional optional donations from potential attendees. The ticket cost will not be deductible as a gift. However, the additional optional donations will be tax deductible.

Example

After all this, let’s do an example. 

Let’s say there is a Gala dinner followed by a charity auction, which Bob attends. Bob pays $500 for the dinner worth $100 and he successfully bids $1,000 for a golf bag worth $100 and $500 for wine worth $50.

In that case Bob can claim 3 deductions. He can claim $400 for the ticket, $900 for the purchase of the bag and $450 for the purchase of the wine. 

FBT

And last but not least, just in case it confuses you. FBT also has a minor benefit rule. But it is a case of same name – different rule. The minor benefit rule for FBT purposes has nothing to do with the minor benefit rule for contributions to charities.

For FBT purposes, benefits that are less than $300 in notional taxable value count as minor benefits and hence are exempt from FBT. But that is FBT land and has nothing to do with tax deductible contributions.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Tax Deductible Donation

Tax Deductible Donation

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When can you claim a tax deduction for a donation you make? What makes a donation a tax deductible donation?

Tax Deductible Donation

The short answer is: You can claim a deduction, if you have a tax receipt from an entity with DGR status that says it is a tax deductible donation.

The long answer is more complicated and goes like this: A tax deductible donation is either a tax deductible gift or it is a contribution that falls under s8-1 or the minor benefit rule.

If a charity has given you a receipt that says tax deductible gift, you can stop here. You got your tax deductible donation.

But if the charity hasn’t given you a receipt yet and there is a question mark whether you will, then the following is for you.

Donation

A donation is any money or property you voluntarily give to a charity – be it a gift or a contribution. 

DONATION = GIFT + CONTRIBUTION

If you get nothing in return, your donation is a gift. If you get anything in return, your donation is a contribution.  

So every donation of money or property is either a gift or a contribution. Gift v contribution – that is the terminology the legislator uses in Div 30 ITAA97. The problem is that the ATO doesn’t. They talk about ‘gifts or donations’ in D9 of an Individual Tax return as well as on their website. Messy terminology. Don’t let that confuse you. The end result is the same.

Tax Deduction

Why does it matter whether your donation is a gift or a contribution? It matters for tax purposes. It matters if you want to claim a tax deduction since different rules apply depending on whether something is a gift or a contribution.

Gift

A gift is tax deductible if it meets the conditions listed in s30-15 ITAA97 and TR 2005/13. There are many fine nuances in these rulings, but roughly speaking, a gift is tax deductible if it meets six conditions. It must be

1 – a gift;
2 – of money or property;
3 – of sufficient value;
4 – made voluntarily;
5 – with a tax receipt;
6 – to a recipient with DGR status.

Contribution

A contribution is not deductible since you receive something in return. You are basically buying something, even if it is for a bad price. And so there is no tax deduction. But … there are two exceptions – the general deduction in s8-1 ITAA97 and the minor benefit rule. 

General Deduction s8-1

The general deduction in s8-1 (1) ITAA97 allows you to claim a tax deduction whenever you pay for something to gain assessable income. To get brand exposure or to buy donor data for example.

Minor Benefit

Whenever you get a benefit in return, you didn’t give a gift. But if this benefit is so minor in comparison to what you pay – if you pay way above market value – then you must have done this to support the charity.  

The dinner and auction was just the side show. It is a minor benefit in comparison to what this is about. This is the reasoning behind the minor benefit rule.  

Minor Benefit Rule s30-15

The minor benefit rule in s30-15 ITAA97 allows you to claim a tax deduction for a contribution if your contribution passes two tests.

The contribution needs to be LIKE a tax-deductible gift …apart from the fact that it isn’t since you received something in return. So it must meet all the conditions a gift has to meet apart from being a gift. That is the first test.

The second test is that the benefit must be minor. To pass there are five conditions about you, the charity and the event.

# 1    Individual

You must be an individual. Only individuals can claim a tax deduction under the minor benefit rule, but companies, trusts and partnerships can’t. 

# 2   Fundraising Event or Charity Auction

The minor benefit rule only applies to fundraising events and charity auctions. So it doesn’t apply – for example – to the cost of merchandise you buy through a charity website.

# 3    Tickets

If you claim the price of a ticket, you can only claim up to two tickets. 

# 4   Less Than 15 Similar Events

The charity running the event must run less than 15 events of this type per year.

# 5   Minor Benefit

This is the big hurdle. Whether a benefit is a minor benefit depends on its market value and what you pay for it.

The benefit you get must be worth $150 or less. And what you pay must be at least 5 times more than what you paid. These are the two deciding factors – market value and what you pay.

Market Value

The market value of the benefit must be $150 or less. If it is worth more than $150, no minor benefit. So if the ticket or auction item is worth more than $150, it doesn’t qualify as a minor benefit. 

But remember this is not about what you actually pay for the ticket or item. It is about what it is worth – the market value of your ticket to the event. And the market value of the auction item you successfully bid for.

What you Pay

You must pay at least 5 times more than its market value.

And this is just as important. It means that if the meal is worth $100 per head, then you must pay at least $500 for the ticket for it to qualify as a minor benefit. And if an auction item is worth $50, you must pay at least $250 for it.

The argument is that if you pay 5 times more for what it is worth, you clearly pay the money for other reasons than the benefit you get back. Your intentions are clearly altruistic.

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Here is more about the minor benefit rule. If you get stuck, please call or email us. There might be a simple answer to your question.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Who Gets My Super

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Who gets my super when I die? Did you ever ask yourself that question? 

Who Gets My Super

Our lawmakers want your super to be gone when you go. That’s why they gave you – in their eternal wisdom – minimum pension payments to contend with. That is why it gets harder and then impossible to make personal contributions past 74. And why there are caps on contributions full stop.

But let’s assume that despite all their efforts, at the end you still have some super left. Who gets it?

Your Choice

The simple answer is that you can leave your super to whoever you like. It is your super. You can make a binding death benefit nomination or leave it to the trustee’s discretion. Your choice.

But there are strict rules around how your super is actually paid out and how much tax it cops on the way out.

SIS Dependant

SIS dependant is a strange word. But it is an important one. You will shortly see why. Your SIS dependants are:

1 – Your spouse (married or de-facto but not your ex)
2 – All your children regardless of age
3 – Anybody living in an interdependency relationship with you
4 – Anybody financially dependant on you who is not your child

For an interdependency relationship think of your elderly mother who lives with you. You live together, have a close personal relationship and one of you provides financial and domestic support as well personal care to the other. 

Financially dependant means just that – somebody depends on you financially. Think of your orphaned nephew who you put through college.

Directly or Via Estate

Upon your death, your super can leave your fund in two ways.

Your super can go 1 – directly from your fund to your SIS dependants, or 2 – into your estate and then your legal personal representative (LPR) will distribute it – in accordance with your will if you left one. 

So anybody can receive your super through your estate but only your SIS dependants can receive it directly from your fund.

Lump Sum or Pension

Your super is usually paid out as a lump sum – either in cash or in specie. In specie means that the asset is transferred.

Lump sum is the default mode. It means your super leaves the low-tax super environment straight away and in one hit – the legislator’s preferred option.

But there is another way and that is a death benefit pension. With a death benefit pension your super stays within super and is only slowly paid out via pension payments.

The legislator doesn’t like this one for obvious reasons. And so they limited the circle of possible recipients to your spouse, your children under 18 as well as anybody living in an interdependency relationship with you or financially dependant on you who is not your child.

Your adult children, however, are out. They need to take their super as a lump sum.

But there two exceptions. A child between 18 and 24 and financially dependant on you can get a death benefit pension but needs to take the rest as a lump sum on their 25th birthday. And children with a disability can receive a death benefit pension regardless of age.

Now you know who can get your super and how. The next step is to look at how much tax your super cops on the way out. And for this you need to work out who your tax dependants are. 

Tax dependants

Your tax dependants receive all your super tax-free. Non-tax dependants receive your tax-free component tax-free, but pay tax on your taxable components (15% on any taxed element and 30% on any untaxed element).

So who are your tax dependants? There are 4 types.

1 – Your spouse (married, de-factor as well as former spouses)
2 – Your children under 18
3 – Anybody in an interdependency relationship with you 
4 – Anybody financially dependant on you

A child over 18 can still be your tax dependant if they live with you in an interdependency relationship or are financially dependant on you (just in case you ever want to look this up: ATO ID 2014/22).

In most cases your SIS dependants are also your tax dependants and vice versa –  but with two exceptions.

1 – Your financially independent adult children are your SIS dependants, but not your tax dependants. So they can get your super directly from your fund, but pay tax on it.  So leave your super to your spouse or dependant family members or cash it out before you go.

2 – A former spouse is your tax dependant but not your SIS dependant. So if your estate paid your super to your ex, then she or he wouldn’t pay tax on it.

For all your tax dependants you can stop here – no tax to pay.

But for your non-tax dependants here is how much tax they will pay. It all depends on how much of your super sits in your tax-free and taxable components.

Tax-free and Taxable Components

Your super consists of two components – tax-free and taxable.

In theory the taxable component consists of two elements – taxed and untaxed, but untaxed elements are rare, so most taxable components consists of just taxed elements. 

Untaxed elements usually only appear if there has been a pay-out from a life insurance policy held by the fund or the fund itself is untaxed, which only applies to certain government sector funds. 

Every recipient receives these components and elements in the same proportion as they exist in the relevant super account. So you can’t pick and choose who gets what component or element.

The good news is that your non-tax dependants pay zero tax on your tax-free component.

The bad news is that they pay tax on the taxable component. How much depends on whether your super is paid as a lump sum or as a death benefit pension.

Lump Sums

Non-tax dependants pay 15% tax on any taxed element and 30% on any untaxed element – both plus Medicare – if they receive your super as a lump sum. Age doesn’t affect the taxation of lump sums. But it does for death benefit pensions.

Death Benefit Pensions

Age only matters for the taxable components of death benefit pensions. Tax-free components are tax-free regardless of age.

If one of you is 60 or over at the time of your death, the taxable component of any pension payments is tax-free. 

However, if one of you is below 60 at the time of your death, then your beneficiary includes any taxable component in their assessable income with a 15% tax offset. But this stops the moment the beneficiary turns 60. From then on the beneficiary will receive the taxable component tax-free.

There is just one exception to all this – untaxed super funds. But these are rare and a dying specie within the government sector, so let’s not worry about those.

Death Benefit Nomination or Valid Will

So now it is time to put all this in place. You decide how you do this. You can

1 – Make a binding death benefit nomination that pays your super to your SIS-dependants and/or estate – renew every 3 years or make it non-lapsing;

2 – Make a non-binding death benefit nomination to your SIS dependants and/or estate but the trustee makes the final decision.

3 – Make no death benefit nomination and leave it up to the trustee to decide how much should go to your SIS dependants and/or estate;

And for any super within your estate:

4 – Make a will that stipulates who gets how much of your super; or

5 – Leave it up to your LPR (executor or administrator) to decide what happens to your super in your estate.

Review

Looking at all this, is this really what you want?

For example, are you sure you really want your super to go to your financially independant adult children, even when they have to pay 15% or 30% tax plus Medicare on any taxable component?

Or are you sure you really want to leave it up to others by not having a binding nomination and will?

If you aren’t, please give us a call. We will be able to help. It would be a pity to get this wrong and have your super go places or trigger tax that you didn’t want.

 

MORE

SMSFs Need an ABN

How Much Will Your SMSF Cost

Collectables and Personal Use Assets

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

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