Don’t Forget Your (Superannuation) Cap

My coat stand at home has a lot of caps on it; baseball caps, old school caps, cricket caps, a memento of the Sydney Harbour Bridge Climb and the list goes on! There are also a lot of “caps” for superannuation funds, but they are not the sort you wear on your head.

In the context of superannuation, a “cap” is an upper annual limit or a ceiling that is permitted within the superannuation laws. The more important caps include:

  1. Concessional Contributions Cap – this is the maximum “concessional” type contribution allowable for each member in a financial year. This cap is currently $25,000. Concessional contributions are taxable at 15% in the fund as the contributor has claimed a tax benefit and this type of contribution can include; employer contributions, salary sacrifice, self-employed and personal contributions. Note that as from 1/7/2018 there will be an option available to carry forward unused concessional contribution limits for individuals who have less than $500,000 in superannuation. There is also an option available to those with Self Managed Superannuation Funds to claim 2 years contributions in the one financial year.
  1. Non-concessional Contribution Cap – this is the maximum “non-concessional” type contribution that can be contributed personally by each member. These contributions types are not claimed for tax purposes and the fund does not have to pay any 15% contribution tax on the amounts received. The current cap is $100,000 pa but there is an option to “bring forward” up to 3 years contributions in one year (i.e. $300,000) for those individuals who are under 65 years of age.
  1. Total Superannuation Balance Cap. As from 1/7/2017 each member has a total superannuation balance cap of $1.6 Million. This refers to the total amount that a person has in all superannuation accounts. Once that cap is exceeded, no further non-concessional contributions are allowed for that individual unless this cap falls below the $1.6M (as measured at the start of each financial year). Note that concessional contributions can continue regardless of the total superannuation balance.
  2. Transfer Balance Cap. This is the maximum amount that an individual can transfer to retirement phase pension accounts and is currently also $1.6 Million. The income and capital gains derived from assets supporting retirement phase pension accounts are exempt from income tax and capital gains tax. This contrasts with other superannuation assets in “accumulation accounts” which are taxed at the rate of 15% on income and 10% on capital gains. The Transfer Balance Cap should not be confused with the Total Superannuation Balance Cap as it does not restrict the amount you can contribute to superannuation but rather how much of your superannuation you can move to the tax free retirement phase. To determine where an individual is relative to their Transfer Balance Cap, an account will be maintained that tracks all the relevant transactions that affect this balance. This account is referred to as the Transfer Balance Account (“TBA”). As an example, let’s say Fred has an accumulated superannuation balance of $2 Million and upon retirement at age 65, decides to move the maximum $1.6 Million into a retirement phase pension account and leave the other $400,000 in an accumulation account. The following table illustrates the effects of various transactions over the following years: As Fred’s TBA has been reduced to $1.1 million, he could transfer up to a further $500,000 into retirement phase pension. He could therefore transfer the full balance of his accumulation account ($485,000) into pension mode and his total superannuation balance of $1.75 million would then be entirely in pension phase and the fund would pay no income tax or capital gains tax thereafter. Note how many of the transactions that affect the superannuation account balance, such as income earned and pension withdrawals, do not affect the TBA. Also, if Fred had simply withdrawn the $500,000 he wanted to make the family gift as additional pension payments (rather than commuting back to accumulation and then paying the $500,000 from there), he would still have a TBA of $1.6 even though his pension account balance is only $1.265 million. He would then be stuck with having to leave the $485,000 in accumulation mode and the fund would pay tax on the income and capital gains generated from that account.
  1. Division 293 Cap. This is calculated as the personal income of a taxpayer plus concessional superannuation for that individual for a financial year. If this figure exceeds $250,000, the tax rate payable on the contributions if increased from the usual 15% to a penalty rate of 30%.
  2. CGT Concession Cap. This refers to an additional contribution amount that is allowed from the sale of a small business. This cap is currently $1.445 Million per person and is in addition to the other contribution caps and is not constrained by the Total Superannuation Balance Cap.
  3. Low Rate Cap. This is an amount up to which superannuation lump sum payments paid to individuals over preservation age but below 60, are not subject to tax. Lump sums above this cap paid to such individuals, attract a rate of 17% tax. The current low rate cap is $200,000.
  4. Pension Withdrawal Cap. This refers to the maximum annual amount that can be withdrawn from a Transition to Retirement Pension Account. This is currently 10% of the balance of the account at the start of the financial year (or at pension commencement). Note that this should not be confused with the minimum pension withdrawal requirements which apply to all types of superannuation pension accounts.

    The following table summarises the caps referred to above – current for 2017/18 financial year:

Exceeding a superannuation cap can have serious consequences. This would generally include paying extra tax and charges and can be as high as 47% of the relevant amounts depending on the circumstances.

It is also important to effectively manage your superannuation caps. As an example of this, assume you start a retirement phase pension with $1.6 Million and start by withdrawing just the minimum required pension of $64,000 pa. A few years down the track, you decide to help out a family member with a loan of $250,000 and provide this by simply drawing an additional pension amount. A year later, the loan is paid back and you go to contribute it back into your retirement phase superannuation account but to your horror, discover that this is not possible as your TBA is still at the cap amount of $1.6 Million! This could have been avoided by covering the $250,000 with a commutation of your pension account (back to accumulation phase and then paid as a lump sum amount) which would have reduced your TBA to $1.35 Million, thus allowing the $250,000 to be transferred back to pension phase later without exceeding your cap.

Timing can be important in the context of managing caps, particularly those relating to contributions. As a simple example, assume that a 66 year old person has an existing superannuation balance of $1.58 Million and has just sold a small business and wishes to contribute; $25,000 concessional contribution, $100,000 non-concessional and $1.445 Million CGT contribution. If the timing of these contributions is not handled correctly, it could result in the person not being able to contribute the $100,000 non-concessional amount.

Most of the superannuation caps are subject to some form of indexing. Therefore, over time we will expect to see the monetary amounts of the caps increase

What software should I use for my SMSF?

Self-Managed Superannuation Funds (“SMSF”) have a number of unique aspects which mean that standard business software is not suitable for maintaining the relevant accounting records and tracking the various compliance aspects. For example, it is necessary to track individual member balances including allocation of a proportionate share of income and taxes. There are also annual contribution limits and minimum pension withdrawal amounts that need to be tracked and reported. What should I look for when trying to assess a software application to help manage my SMSF?

 There are a number of software solutions available that have been designed specifically for SMSF’s, however most have been designed to be used by professionals for delivering compliance services to their SMSF clients and are generally not suited to fund trustees who wish to take a more active role in maintaining the financial records and managing the operations of their fund.

For these trustees, Practical Systems have developed a specialized and easy to use solution Practical Systems Super. The Company has been successfully developing and supporting software solutions for farmers and small business for more than 25 years.

Practical Systems Super has been developed using the latest cloud based technology making it ideal for collaborating between all members of the SMSF “team” including; auditor, tax agent, financial adviser and fund members. The system is operated from any web browser and does not require any installation of software or set up.

The software is backed by a support network of professionals who understand self-managed superannuation and have significant industry experience. All software development, help desk & professional support and all administration is conducted from the Company offices in Armidale in regional NSW and they do not use any overseas outsourcing. All data is stored on secure servers within Australia.

Some of the features of the Practical Systems Super application include:

  • Simple financial transaction entry including automated bank data feeds and a “transaction wizard” for those who may struggle with accounting jargon and double entry bookkeeping concepts
  • Complete investment tracking including real-time valuation of portfolios
  • Easy viewing of real time member balances, investment listings, etc. with extensive use of graphs and simplified presentations
  • Free set up of all initial fund information and opening balances – simply provide the information to Practical Systems on the standard forms supplied and your fund will be fully set up and ready to use from your first log in.
  • Automated year-end close off including automatic tax calculations and allocation of income and tax between members
  • Extensive range of reports for all management and compliance purposes
  • Additional users can easily be added and access rights to various parts of the software customized for each user. These additional users might include; auditor, accountant, financial planner, etc.
  • Access is available via other devices such as mobile phones and tablets
  • Future capability to create and store all relevant fund documents such as minutes, trust deeds, trustee declarations etc. integrated with electronic signing

Another unique aspect of Practical Systems Super is that all of the data within the system remains under the ownership and control of the fund trustees. This means that if the trustees at any stage wish to change a professional adviser such as auditor, tax agent or financial adviser, they can make the change instantly without any delays waiting for records to be transferred. All of the fund records are instantly available to the newly authorised user.

The software is also suitable for professional accountants and has specific provision for efficiently managing multiple funds within a single “group” of fund clients.

The software is provided on the basis of an annual subscription and will be constantly updated to reflect the latest tax rates and superannuation laws. These changes will be automatically available to all users without the need to download or install upgrades.

The people behind the software have a keen interest in self-managed superannuation and are passionate about helping individuals secure their financial futures using the SMSF concept. The professional and personalised support provided is a key element of the Practical Systems Super solution.

Deferred farm income – The sleeping giant?


Farm businesses can often accumulate “deferred income”: income that would usually be taxed in the year it is earned or generated, but is deferred or delayed to a future year through various mechanisms available to primary producers.

Over time, these deferred amounts can become substantial, with the potential for unexpected tax consequences arising from an unplanned event.

Even with good planning, “deferred income” could build up significantly over time – and reducing it could be expensive, due to tax paid at higher rates.

Superannuation could be the slingshot to bring down this Goliath.

Types of deferral

Deferrals can be either deliberate (for example, depositing funds into a Farm Management Deposit), or simply occur in the normal course of events (such as when market values for livestock rise above their current book value).

Deferred income can be generated through:

Farm Management Deposits (“FMDs”).
Using this scheme, primary producers can reduce their taxable incomes in “good” years by depositing cash in special types of bank deposits. These deposits can be redeemed in “bad” years; they are included with taxable income in those years, but are often offset by additional expenditure, such as fodder. In this way, FMDs can be a very effective tool as part of a drought management strategy. However, they can also become a risk if they build up to a level beyond reasonable requirements. Farming families can accumulate significant amounts in these facilities: up to $800,000 per person.

Deferral of livestock profits arising as a result of loss or destruction of pastures – often referred to as “Drought Forced Sales”.
This popular technique is used in drought periods or dry spells when farmers have to sell livestock because of poor pasture conditions. This strategy effectively reduces taxable income in this situation, and does not involve the outlay of any cash. One risk is that deferrals can only be made for up to five years; sometimes farmers use the cash from the proceeds of the “forced sales” for other purposes, and a build-up of deferred sales can create problems if a run of “good” years follows dry spells.

Unrealised profit in livestock inventory.
Many farmers will use the “average cost” method for valuing year end livestock inventories for taxation purposes. This means – particularly for those who breed (rather than trade) livestock – the taxation value of inventories over time can be considerably lower than market value. If the farm or other assets are sold, that difference between average cost and market value is realised, and can significantly increase taxable income.

Excess depreciation claims.
The depreciation provisions are generally fairly generous, enabling farmers to claim large proportions of plant and equipment capital expenses against taxable income. (For instance, the 100% write off option for assets costing less than $30,000.) Over time, the total “written-down value” of farm plant can be much lower than the value that would be realised at a clearing sale. Any excess received on the sale of plant (over taxation written-down value) will be taxable income, and not subject to the CGT exemptions – unlike the sale of farm property, which is a capital gain event, but often exempt from any tax due to the Small Business Tax Concessions.

These examples are not exhaustive, and other provisions can defer farm income.

Consequences of deferred income

An unplanned tax event can have unexpected – and expensive – tax consequences.

For example, when a person dies, any FMDs or drought deferred sales related to them automatically becomes taxable income in the year of their death. Depending on their circumstances, this can create a significant tax bill.

The same is true if the taxpayer ceases to be a primary producer – for example, if they retire or exit the family business to allow a family member to take over. If the farm is sold, deferred income can be realised from livestock dispersal (at market value) and the sale of plant and equipment at the farm clearing sale.

The key here is (a) to be constantly aware of the accumulated amount of “deferred income” you are carrying forward; and (b) to ensure that you include this aspect in your succession and retirement planning.

A superannuation contribution strategy can “chip away” at deferred income by moving the deferred income into a retirement savings vehicle, using the applicable tax concessions to improve the result.


A farming family of two parents and their son and daughter have accumulated $1M in “deferred income”, mainly in FMD’s. After a run of “good” years, they now feel the amounts in FMD’s are excessive to their needs. They also need to return drought deferred sales as income over the next couple of years.

They could make concessional superannuation contributions to the allowable cap of $25,000 per person (i.e. a total of $100,000 pa), funded either in part or in full by redemptions from the FMD’s.

Each year, they could reduce deferred income by $100,000 at an effective tax rate cost of 15% (the rate the superannuation fund must pay on the contributions received).

Depending on the family’s other incomes, this rate may be considerably less than they would pay if they simply returned the income with no offset and tax paid at that personal marginal or average rates.

Over time, they could save tens of thousands and possibly more, particularly in the case of an unplanned event or death situation.

Another advantage of this strategy is that the family starts to accumulate a significant off-farm asset in a tax-effective environment, which could be a future source of tax-free retirement income.

Should they wish to maintain “control” over their investment assets, they could use a Self-Managed Superannuation Fund structure.

Why Choose a Self-Managed Superannuation Fund (SMSF)?

Roughly one-third of all superannuation monies in Australia are contained in self-managed funds and these have continued to increase in popularity with consistent growth over the past 10 years. There are currently around 600,000 SMSF’s in Australia. This fact sheet discusses some of the reasons you might choose to manage your own superannuation fund.

For an employee in the private sector or a business person, the options for superannuation can include:

  1. Industry Funds – these are so called “profit for members” funds usually designed for people in a particular industry – for example, cbus in the building industry and HESTA for the health and community services sector
  2. Retail Funds – open to the public and run by financial institutions such as banks and insurance companies
  3. Corporate Funds – established by a particular employer and only open to their employees
  4. Self-Managed Superannuation Funds (“SMSF”) – “do-it-yourself” funds controlled by the members

The reasons for choosing the self-managed route are varied but can include:

A. Control. The members of the fund are also the trustees of the fund and therefore have ultimate control over all aspects of the operation of the fund including investment policy and administration.

B. Flexibility. SMSFs can be far more flexible and personalised in their operations. For example, SMSFs have the ability to:

  • Transfer business real property and listed securities owned by members to the fund
  • Invest in projects in conjunction with business associates or in other non- traditional asset types
  • Take advantage of the of the provisions that effectively allow the “bring forward” of next year’s concessional contribution cap and enabling the member to claim 2 years contributions for tax purposes
  • Customise life insurance arrangements to the precise requirements of individual members
  • Loan (up to 5% of assets) to related business entities

Note however, that SMSFs cannot generally run a business as that could be taken as not meeting the “sole purpose test”.

C. Convenience. As members are the decision makers and administrators (including controlling the fund bank account) they can effect transactions instantly – such as short notice changes to pension payments, contributions, commence a transition to retirement income stream, implement contribution splitting, etc.

D. Administration Costs. Generally, industry and retail funds can charge between 1.0% and 2.0% of account balance in administration type fees and often there are other fees “hidden” within investment returns. The administration costs for an average SMSF would be typically less than 5%.

E. Effective succession planningA self-managed fund provides more options for leaving account balances in the fund for the benefit of surviving dependents and members can effectively create a strategic estate plan outside the member’s will. This can include using the fund as a so called “family superannuation fund” involving other family members (subject to the limitation of the number of members).

F. Ability to utilise borrowings for investment “gearing”. This can be for the purchase of property and shares and unit trust investments via a “Limited Recourse Borrowing Arrangement”. Note that these arrangements can be complex and appropriate professional advice should be sought before considering this.

Note that there are a range of responsibilities associated with running an SMSF. For some people, being more engaged with their retirement fund can be very rewarding while others may find it a burden. It is therefore important that individuals get appropriate professional advice and fully consider all aspects before deciding on the self-managed option.


Bob’s career spans more than 40 years in accounting, taxation and financial services. His specialty is self- managed superannuation funds and the development and management of financial accounting software.

Bob has experience as a partner in a large accounting firm, as administrator of a large corporate superannuation fund with more than 1000 members and as owner/founder of Practical Systems.


The information provided in this article is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute financial advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from an appropriately qualified and licensed professional