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Have you considered gifting a superannuation contribution this Christmas?
SMSF expert Graeme Colley explores the rules and regulations surrounding SMSFs receiving gifts and family contributions.
Can an SMSF receive Christmas gifts?
09 December 2021
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8 minute read
Can an SMSF receive gifts at Christmas? Well, not really, but it can accept contributions for members of the fund such as all the family. With the opportunity to have up to 6 members in an SMSF, mum, dad, and the children can all be members of the one fund.
If you wish to contribute for your spouse or children because you know they already have more than they could wish for, can it be done effectively? Just imagine their faces when they open their ‘super’ presents and see what you have done. Let’s look at how contributions can benefit family members by starting with spouses and then moving on to children.
There are a number of ways that contributions can make it to a spouse’s superannuation account. You could make spouse contributions (non-concessional contributions) to the fund, or you could gift the money to your spouse for them to contribute to super. Or, if you have concessional contributions made by your employer, there is the potential to split those contributions to your spouse in the year after they were made.
Spouse contributions
Spouse contributions are contributions that you make directly to your spouse’s superannuation fund, which can include an SMSF. They are treated as non-concessional contributions (non-tax-deductible contributions) and are restricted by the contribution caps and work tests that apply.
If your spouse is under age 67, then there is no requirement to meet a work test, and it may be possible to use the bring forward non-concessional contributions cap, which will allow up to $330,000 to be made over a three-year fixed period, but that depends on the balance your spouse has in super on 30 June in the previous financial year. Once your spouse reaches 67 years old, then the maximum non-concessional contributions that can be made are limited to $110,000, but a work test must be met, and your spouse must have no more than a total balance of $1.7 million in super on 30 June in the previous financial year.
One benefit of making spouse contributions to super is that you may qualify for a tax offset in your income tax return of up to $540 for the first $3,000 contributed to your spouse’s superannuation. The tax offset depends on whether your spouse’s adjusted taxable income is less than $40,000. So even you may qualify for a small gift when your tax return is lodged.
Gifting contributions to a spouse
Another way of gifting super to your spouse can be to transfer the amount to a bank account in their name. It will be for them to decide whether a concessional or non-concessional contribution or combination will be made to their super fund. Depending on what other contributions are being made to super, your spouse may wish to claim a tax deduction depending on whether their employer is making super guarantee contributions or salary sacrifice contributions for them.
For the 2021/22 financial year, the maximum concessional contribution should be limited to no more than the standard concessional contribution cap of $27,500. But if your spouse’s total super balance is less than $500,000, they may be able to carry forward unused amounts up to their cap limit for up to 5 years. Concessional contributions above the relevant cap may result in excess concessional contributions tax applying.
Here’s an example:
Tracey’s partner has decided to gift $35,000 from an inheritance she received from a distant relative. During the 2020/21 financial year, no concessional contributions were made for Tracey. As she has worked for part of the 2021/22 financial year, it looks like her employer will make a super guarantee contribution of $10,000. As she has a super balance of $300,000 on 30 June 2021, she qualifies to use the carry forward amount from her unused concessional contributions.
The amount of the carry forward contributions will be the standard contribution of $25,000 from the 2020/21 financial year and $17,500 (the standard contribution for that year of $27,500 - $10,000), which is the unused concessional contributions from the 2021/22 financial year. Therefore, she may be able to claim a tax deduction of $35,000 for super contributions in the 2021/22 financial year. Her concessional contributions cap includes the carry forward amount from the 2020/21 financial year of $25,000 plus the unused concessional contributions for the 2021/22 financial year of $17,500 which total $42,500.
If your spouse decides not to claim a tax deduction for contributions, then they could make non-concessional contributions. The amount that can be made is determined by the amount your spouse has in super on 30 June in the previous financial year, their age and whether they meet a work test if they are between 67 and 75.
Here’s another example:
Ingrid, who is 66, has decided not to claim a tax deduction for $200,000 as a super contribution which was gifted to her by Geoff, her spouse. She has a total amount in super of $1.4 million.
Ingrid is under age 67, so there are no work tests required to be met if she wishes to contribute to superannuation. Also, as her total super balance was less than the relevant threshold of $1.59 million, she can contribute the whole $200,000 to super by using the bring forward non-concessional contribution rule, which applies in her situation.
Splitting concessional contributions
Another way of gifting superannuation to your spouse could be to split the amount of concessional contributions that have been made to super for you. This includes employer super, salary sacrifice and personal deductible contributions. The splitting rules allow you to split up to 85% of your concessional contributions to your spouse up to the amount of your concessional contributions cap.
The split to your spouse usually occurs in the financial year after the concessional contribution has been made. However, if you are using all of your balance to roll over or transfer your super to another fund or withdrawing it as a lump sum then you must split the contribution to your spouse before that takes place whether it’s in the year the contribution was made or in the year after the contributions were made.
There are limits on when the concessional contribution can be split, depending on your spouse’s age and whether or not they have retired. If your spouse is under preservation age, currently age 58, the split can occur even if they are not working. However, once they are at least age 58 and under age 65, they must not have retired for the split. After age 65, no split can be done.
Splitting comes in useful if you are trying to even up super balances between you and your spouse – especially if your super has reached certain thresholds for pensions and contributions.
Gifting super to children
If you think your children have everything these days, then the question is whether making a super contribution when they are relatively young can make a difference to their retirement savings. Remember the effect of compounding returns, and if they are better than the inflation rate, it can mean increases in the actual value of the amount accumulated for retirement. Your children may not thank you now but will appreciate it if the amount finally accumulated over time may allow them to retire earlier.
Example
Let’s say you gifted $1,000 to one of your children when they were 20 years old, and they contributed it to super.
Claiming a tax deduction
If your child was working and earning income, they might have the opportunity to claim a tax deduction as a concessional contribution. If that wasn’t for them, they could still contribute a non-concessional contribution to the fund, which is non-deductible for tax purposes. If they claimed a tax deduction, they would most likely save some personal tax, but the contribution would be taxed in the fund at 15%, which means the amount in the fund available for investment would be $850. If this amount was invested in the fund for at least 45 years and the fund earned an average of 7% long term after tax, it may grow to just under $18,000.
Not claiming a tax deduction
If your child decided not to claim a tax deduction for the $1,000 contribution, then after at least 45 years with a long-term average rate of return of 7% after-tax, it would grow to around $21,000. Your child may also qualify for the co-contribution, which may increase the amount in super by up to another $500, giving their retirement savings an additional boost.
Just a word of warning if you are thinking of gifting super contributions to your children who are over 18. Make sure that the amount to be contributed is gifted to your child and for them to make the contribution directly to the fund as part of their retirement saving. This will avoid some tax issues that would arise if you contributed on your child’s behalf.
Christmas Super Wishes
The year is drawing to a close, and hopefully, we can look forward to next year with a lot more optimism and the good things it will bring. But before we celebrate the start of a new year, what could surprise you is this year’s Christmas superannuation stocking to help build retirement savings. Could it be spouse contributions, contribution splitting or the tax benefits of super and don’t forget you’ll need something for the children. Season’s greetings and a Merry Christmas to all – ho, ho, ho.
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