How your SMSF is taxed

Founder and Publisher of the Switzer Report
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Self-managed super funds provide investors with greater control over the tax position of the fund. It is therefore important to understand how your SMSF will be taxed and how different investment strategies can possibly minimise the tax on your fund. The key tax rates and thresholds that apply in relation to super contributions and benefits are detailed below.

Concessional contributions

Concessional contributions include those made by your employer, either as part of the employer’s compulsory contribution or those made under a salary sacrifice arrangement, or personal contributions claimed as a tax deduction by a self-employed person. For most people, concessional contributions are taxed at 15%.

If your ‘income’ is more than $300,000 pa, your concessional contributions will be taxed at 30%. The definition of ‘income’ includes your taxable income, plus your concessional contributions, plus adjusted fringe benefits plus total net investment losses. For example, if your taxable income is $280,000 and your employer makes $25,000 in concessional contributions, you will trigger the threshold – your ‘income’ will be assessed as $305,000. The additional tax of 15% will apply to those concessional contributions that take your ‘income’ over $300,000 – in this case 15% on the extra $5,000.

Further, as ‘income’ includes investment losses from investing in shares or borrowing money to negatively geared investment property, you will need to add these back to your taxable income. For example, assume your taxable income is $200,000, which has been calculated after deducting a net $90,000 loss on two investment properties. You also receive $10,000 in fringe benefits, and your employer makes super contributions of $18,000. Under this measure, your ‘income’ is:

Taxable income$200,000
Concessional contributions$18,000
Fringe benefits$10,000
Net investment losses$90,000

In this example, your $18,000 in concessional contributions will be taxed at 30%.

The cap on concessional contributions is $30,000. For those aged 50 or over (or who turn 50 during the financial year), a higher concessional cap of $35,000 applies.

From 1 July 2013, concessional contributions in excess of the cap are taxed at the same rate as if you received that money as salary or wages. Excess concessional contributions are effectively taxed at your marginal tax rate, plus an interest charge.

Non-concessional contributions

Non-concessional contributions include personal contributions for which the member does not claim a tax deduction. There is no tax applied to non-concessional contributions up to the cap amount. However, non-concessional contributions in excess of the cap are currently subject to tax on the excess at 47.0%. The Government has proposed changing the rules such that the excess could be withdrawn without penalty, together with any associated investment earnings. The investment earnings would then be taxed at your marginal rate.

The cap on non-concessional contributions is $180,000.

Under a special provision known as the ‘bring-forward’ option, people under 65 years old may be able to make a non-concessional contribution up to three times their cap limit – that is, a contribution in one year of up to $540,000. However, total contributions over the entire three year period must not exceed $540,000.

Super lump sum payments

A super lump sum paid to a member aged 60 years or over is generally tax free. But for those under 60 years old, some tax is payable.

The super lump sum benefit can comprise both a taxable component and a tax-free component. The tax-free component essentially represents the return of the member’s non-concessional contributions (that is, money the member contributed personally to the SMSF from his or her after-tax income or assets). Accordingly, no tax is assessed on the tax-free component.

Taxable component

The taxable component is that part of the lump sum benefit that may be taxable. It can comprise two parts:

  • A taxed element – this represents an amount that has already had tax paid on it within the fund. Additional tax may be payable when is taken out of the fund as a benefit (lump sum or pension), depending on the member’s age when it is taken out. The taxed element generally represents the return of ‘concessional contributions’ and the investment earnings of the fund; and
  • An untaxed element – that part of the benefit (if any) that hasn’t had any tax paid on it in the fund. An untaxed element may occur if the fund has received a deduction for life insurance coverage held through the fund, or a rollover of a member’s benefits from certain unfunded public-sector super schemes. Some lump sum or pension benefits paid by SMSFs will not include an untaxed-element.

The tax rates for the taxed and untaxed elements of the taxable component of a super lump sum are as follows:

Age of Member When Benefit is ReceivedTaxed ElementUntaxed Element
60 or aboveTax freeAmount up to the untaxed plan cap: 17.0%
Amount above the untaxed plan cap: 47.0%
Above preservation age and under 60Amount up to the low rate cap: 0.0%
Amount above the low rate cap : 17.0%
Amount up to the low rate cap: 17.0%
Amount above the low rate cap amount and up to the untaxed plan cap: 32.0%
Amount above the untaxed plan cap: 47.0%
Under preservation age22.0% on whole taxed elementAmount up to the untaxed plan cap: 32.0%
Amount above the untaxed plan cap: 47.0%

The low rate cap is the limit set on the amount of the taxable component of a lump sum benefit that a person above preservation age but less than 60 years old can receive tax free. The low rate cap amount is indexed each year and is $180,000 in 2014/15.

The untaxed plan cap is the limit set on the concessional tax treatment of benefits paid as a lump sum from untaxed elements. The untaxed plan cap amount is indexed each year and is $1.355 million in 2014/15.

Your income stream

Pensions paid to a member 60 years or over are generally tax free. For persons under 60 years old, a tax offset may be available.

The final treatment depends on the source of the income from inside the SMSF. The source (or component) can be either tax-free or taxable, with the taxable component potentially comprising a further two elements: a taxed element; and an untaxed element. (See above under ‘Super Lump Sums’ for an explanation of these terms).

The tax treatment of the income stream is as follows:

Age of RecipientTax Free ComponentTaxable Component – Taxed ElementTaxable Component – Untaxed element
60 or aboveNot assessable (not taxed)Not assessable (not taxed)Taxed at marginal rates
10% tax offset
Above preservation age and under 60Not assessable (not taxed)Taxed at marginal rates 15% tax offsetTaxed at marginal rates
No tax offset
Under preservation ageNot assessable (not taxed)Taxed at marginal rates. No tax offset*Taxed at marginal rates
No tax offset

* 15% tax offset available if disability super benefit

Death benefits

Death benefits can only be paid as a pension to a beneficiary that meets the definition of a ‘dependant’ under both the super laws and tax laws. These include a spouse, a defacto spouse, a child under 18, a financially dependent adult child under 25 years old or a permanently disabled child. In all other cases, including a former spouse or a child over 18 and less than 25 years who is not financially dependent, the death benefit must be paid as a lump sum.

Even when an eligible pension is commenced by a child of the deceased member, the pension must be commuted to a lump sum by the time the child turns 25 years old. The only exemption to this is if the adult child has a permanent disability.

The taxation treatment of a lump sum death benefit depends on the status of the beneficiary (dependant or non-dependant) and the components of the death benefit payment. For a discussion on the components of a lump sum payment, please see ‘Super Lump Sums’ above.

Death benefit lump sums are taxed as follows:

Status of BeneficiaryTaxation of Tax-Free ComponentTaxation of Taxable Component
DependantTax FreeTax Free
Non-DependantTax FreeTaxed element: 17.0%
Untaxed element: 32.0%

A death benefit income stream can only be paid to a dependant. The taxation treatment of a death benefit pension depends on the components of the deceased member’s benefit and the age of both the deceased member (at the time of death) and the age of the beneficiary when they receive the payment. The taxation treatment is the same irrespective of whether the pension is a reversion of an existing pension that was paid to the deceased, or a new pension that is commenced from the deceased’s benefits that were in the accumulation phase.

Death benefit income streams are taxed as follows:

Age of DeceasedAge of Dependant (Beneficiary)Taxation of Tax Free Component *Taxation of Taxable Component
Aged 60 and aboveAny ageTax FreeTaxed Element – Tax Free
Untaxed Element – taxed at marginal rate, 10% tax offset
Below age 60Aged 60 and aboveTax FreeTaxed Element – Tax Free
Untaxed Element – taxed at marginal rate, 10% tax offset
Below age 60Below age 60Tax FreeTaxed Element – taxed at marginal rate, 15% tax offset;
Untaxed Element – taxed at marginal rate.

* Paid as a proportion of the income payment.

Small business lifetime CGT cap

Eligible small business owners can contribute the proceeds from the sale of their business (or an active asset of the business) into superannuation. Provided the business has been held for more than 15 years (’15 year rule’), contributions up to the following lifetime limit will not count against the member’s non-concessional contributions cap. The cap amount is indexed each fiscal year and is $1.355 million in 2014/15. Read more on Making DIY super contributions.

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