SEE HOW CONTRIBUTIONS, INVESTMENTS, INCOME AND DEDUCTIONS AFFECT YOUR TAX
There are numerous tax benefits available to trustees of SMSFs—it’s one of the key reasons people set up and manage their own super fund. It’s important to understand how your SMSF is taxed, so you can create investment strategies that will minimise tax and give you greater control over your retirement savings.
You can receive tax incentives on superannuation at four different stages:
1. When you or your employer make concessional (before-tax) contributions
2. When you receive a co-contribution. You’re eligible for a co-contribution when you make non-concessional (after-tax) contributions and you annual earnings are below a certain level of income
3. When your super fund earns income
4. When you eventually receive your superannuation benefit.
Accumulation and pension phases When members of an SMSF are working and contributing to superannuation, it’s known as the ‘accumulation’ phase. The contributions they make are allocated to their account and the SMSF pays 15 percent tax on all contributions and taxable income within the fund. These funds are preserved until the member reaches 60 or satisfies another condition of release.
Once the member has satisfied a condition of release, such as retiring from work or reaching the age of 60, the money in their account goes into ‘pension phase’. This means they can no longer contribute to the fund, but can receive regular pension payments. Once the member moves into pension phase, the portion of your SMSF supporting that pension is tax free, so no tax is paid on income or capital gains from these assets.
Many people have an accumulation account for contributions, as well as a pension account to withdraw funds at the same time. If you are running both accumulation and pension accounts for members, you can either segregate assets in separate accounts, or obtain an actuary certificate each financial year to determine the proportion of the fund that is tax free. Contributions Concessional (before-tax) contributions made by members or their employers are treated as income for your SMSF and taxed at a rate of 15 percent.
They are completely tax-deductible for those under the age of 75. Non-concessional (after-tax) contributions are not taxed in your SMSF, as the member has already been taxed prior to making the contribution. There are caps on concessional and non-concessional contributions to superannuation and if you exceed these, you can be taxed at the highest possible tax rate. Talk to your accountant to ensure your contributions are within the capped limits.
Income If a member withdraws a pension from your SMSF after the age of 60, is it generally tax-free and doesn’t need to be reported as income on their personal tax return. Income and capital gains from assets sold to fund pension payments are also exempt from tax. If members withdraw a lump sum payment from your SMSF, it may include a taxable component and a tax-free component. Tax-free elements include non-concessional contributions and other amounts that have already been subject to tax. Elements that may be taxed include concessional contributions and investment earnings that have not yet been taxed.
If the member is under the age of 60, income made during the accumulation phase is taxed at a rate of 15 percent. It’s possible to offset earnings and taxable contributions using franking credits and other deductions. Talk to your accountant to find out how to further reduce taxable income while your SMSF members are in the accumulation phase.
Deductions As the sole purpose of an SMSF is to provide retirement income for members, there is only a limited amount of deductions you can make on your fund. Generally, you can claim any expenditure that is not capital, private or domestic in nature if it’s required to produce income or is essential to maintaining your SMSF’s operations.
Common deductions may include:
- Accounting, financial planning, investment advice and audit fees
- Legal fees, except when it’s of a capital nature
- Bank charges
- Depreciation on rental properties
- Costs of calculating and paying benefits to members
- Costs of collecting or receipting member contributions
- Filing, storage and administrative costs Interest paid on installment arrangements
- Life and TPD (Total and Permanent Disability) insurance premiums and fees
- Training courses that complement the investments of the fund
- Anti-detriment deductions for any fund paying a death benefit
- Membership subscriptions for professional associations, investment journals and share market information services
- Travel costs to visit an investment property owned by the fund.
There can be serious penalties for breaching the Australian Tax Office (ATO) regulations, so talk to your accountant before spending the money to ensure it is an allowable deduction.
This information is general in nature and does not take into consideration your personal circumstances. Talk to your SF Wealth financial adviser for SMSF advice that’s right for you.
