Blog

Beware of small SG contributions made to SMSFs wholly in retirement phase

One of the measures to come out of this year’s Federal Budget and is included in a Bill recently introduced into the lower house1, is the proposal to remove the $450 monthly threshold for employer superannuation guarantee (SG) liability. Whilst this measure will expand the coverage of the SG to eligible employees earnings salary or wages less than $450 in a calendar month from a single employer, SMSF members with retirement phase pensions and receiving SG contributions could potentially see an increase in costs and administration to their SMSF.

Whilst the budget measure appears to be targeted at younger, lower income, part time workers2, it will also include older Australians who, for one reason or another, continue to work, albeit on a part time or infrequent basis. There is no age limit to the SG rules, for example, an employee aged 78 who earns $500 in a calendar month will receive an employer SG contribution of $503.

Further, whilst the employee is aged 75+, a superannuation trustee can accept the contribution as SG contributions are ‘mandated employer contributions’, which have no age restriction4. Once the SG contribution has been made to the fund, the member will be able to withdraw the amount, after allowing for tax applicable to the contribution5.

Effect of small SG amount contributed to a SMSF

Consider the following example, assuming the $450 monthly SG threshold has been removed.

Lionel (78) and Jean (76) are members of the Retirement Time Super Fund. They both have all of their respective benefits in the SMSF in retirement phase. Consequently, the SMSF consists wholly of retirement phase pensions for the entire income year.

The SMSF will use the segregated method to claim ECPI for the income year and consequently not require an actuarial certificate. From the 2021-22 income year, an SMSF that consists wholly of retirement phase pensions6 for the entire income year will not be covered by the disregarded small fund asset rule7.

Let’s say Lionel gets some part time work as an employee, getting paid $180 for a day’s work for the month and this this only occurs in the one month in the year.  Lionel’s employer will be required to make an SG contribution of $18 for the month. It would not be surprising that Lionel nominated his SMSF as his choice fund to receive employer contributions.

The effect of the small $18 SG contribution being made to the Retirement Time Super Fund will be:

  • The fund no longer consists wholly of retirement phase account based pensions for the entire income year
  • The fund will most likely be required to use the proportionate method to claim ECPI for the income year
  • Where the proportionate method is used to claim ECPI, the fund will be required to obtain an actuarial certificate prior to lodgement of the SMSF’s annual return for that year.

Whilst the SMSF is still able to claim ECPI, we can see that the small SG contribution has required the fund to incur a cost, expected to more than the amount of the SG contribution.

Some may respond with the suggestion to simply withdraw the $18 SG contribution on the same day such that it can be argued that the SMSF consists wholly of retirement phase account based pensions for the entire income year and consequently can still use the segregated method to claim ECPI, which does not require the cost of an actuarial certificate. This may indeed work, however, note the following:

  • The member would have to monitor their fund’s bank account to ensure the withdrawal of the contribution is made on the same day. Missing it by only one day would mean the fund has non-retirement phase interests at some time in the income year
  • The member may simply withdraw the actual amount of the contribution, not allowing for tax that applies to the contribution. Of course, this could be easily accounted for as a part withdrawal of the member’s accumulation interest and part pension payment – naturally documented at the time of withdrawal
  • It would not be surprising that many SMSF clients would not be aware of the effect of a small SG contribution on the ECPI claim requirements and the first time the fund’s accountant or administrator knows about it is when they are preparing the financial statements for the (previous) income year – too late by that stage.

Further, consider the effect a small SG contribution may have on the amendment to exclude certain SMSFs from the disregarded small fund asset rule from 2021-22. For an SMSF to not be covered by this rule for an income year:

at all times [emphasis added] during the income year, all of the assets of the superannuation fund would, apart from subsection 295-385(7), be segregated current pension assets”.

Whilst the SG contribution may be withdrawn from the SMSF’s bank account on the same day that it’s received and deposited, technically there could be a period of time where the SMSF was not entirely consisting of retirement phase pensions, that is, “at all times during the income year”. Consequently, the SMSF may still be subject to the disregarded small fund assets rule.

In our example of the Retirement Time Super Fund, where either Lionel or Jean had a total superannuation balance in excess of $1.6m at the prior 30 June to the income year the small $18 SG contribution was received, the fund potentially may be required to claim ECPI under the proportionate method and would therefore incur the cost of an actuarial certificate. It would be expected that the ECPI percentage would be very close to, if not 100%.

This scenario and associated compliance issues could be avoided where Lionel directed his employer to contribute to another superannuation fund. However, Lionel would need to be aware of this issue prior to making his choice of superannuation fund with his employer – another SMSF client education opportunity for advisers.

1. Treasury Laws Amendment (Enhancing Superannuation Outcomes for Australians and Helping Australian Businesses Invest) Bill 2021, introduced to the lower house on October 27, 2021.
2. Refer paragraph 1.4, page 7 of the Explanatory Statement.
3. SG rate from 1 July 2021 is 10% and will increase in incrementally to 12% by 1 July 2025.
4. Item 4 of table in SIS regulation 7.04(1).
5. Member aged at least 65: Item 106 of table in Schedule 1 to the SIS Regulations.
6. Excluding defined benefit pensions.
7. Subsection 295-387(3) ITAA 1997
Disclaimer
The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances. While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.