SMSF Tax Components
Your SMSF Super Benefit is made up of two components, namely a Tax Free Component and a Taxable Component. The Tax Free Component typically comes from after tax personal Non Concessional Contributions made by you over time. The Taxable Component typically comes from Concessional Contributions made by you over time which include Employer Contributions and Salary Sacrifice Contributions.
According to the ATO, the Tax Free and Taxable Components of a Member's Super Benefits must be paid in the same proportion as the Tax Free and Taxable Components of the Member's interest in the SMSF. This requirement is known as the "Proportioning Rule".
Assume your Super Benefit is made up of 60% Taxable Component and 40% Tax Free Component. In this case any withdrawals from the SMSF must be paid out in that proportion. So say you withdraw a lump sum of $100,000 from your SMSF then in the above example $60,000 would be Taxable and $40,000 will be Tax Free.
Taxation of Components
The Tax Free Component will always be Tax Free when received irrespective of the age of the Member. The Taxable Component will also be received Tax Free when received by the Member if they are over 60 (even though the component is curiously called Taxable). Similarly the Taxable Component will also be tax free up to the low rate cap amount when received by the Member between your preservation age and 59. Amounts received by the Member above the low rate cap amount between your preservation age and 59 will be taxed at 17%.
Low rate cap amount
The application of the low rate threshold for super lump sum payments is capped. The low rate cap amount is reduced by any amount previously applied to the low rate threshold.
||Amount of cap
Generally, you must reach preservation age before you can access your super. Use the following table to work out your preservation age.
|Date of birth
|Before 1 July 1960
|1 July 1960 – 30 June 1961
|1 July 1961 – 30 June 1962
|1 July 1962 – 30 June 1963
|1 July 1963 – 30 June 1964
|From 01 July 1964
The simplest strategy with the above in mind is for the Member to take their benefit when 60 and the whole issue of being taxed on any withdrawal is eliminated as all withdrawals by a Member after 60 are tax free. The problem that remains is when the Taxable Component is paid to a Non Dependant on the Death of a Member.
Where you have a Taxable Component and you wish to leave your Super Benefit to your Spouse, a child under 18, anyone financially dependent on you or whom you have an interdependency relationship with, there are no tax issues as those beneficiaries will receive the benefit tax free. However where you have a Taxable Component and you wish to leave your Super Benefit to someone other than these beneficiaries, such as a Child over 18 who is not financially dependent on you or a friend, those Beneficiaries will be taxed at up to 17% of the Taxable Component of the Death Benefit.
Assume Barney who is 61 years of age and has a Super Benefit of $300,000 made up of a Taxable Component of $250,000 and a Tax Free Component of $50,000. On Barney's death his Super Benefit is received by his son Barney Junior who is aged 30 and is not a Financial Dependent. Barney's son will not be taxed on the Tax Free Component of $50,000 but will be taxed at 17% on the Taxable Component of $250,000. This equates to a tax liability of $37,500. Ouch!
A strategy to minimise this "Death Tax" is to boost the Tax Free component of a Member's Super Benefit by using a "Recontribution Strategy". In order to undertake a "Recontribution Strategy" the Member must have first met a condition of release to withdraw their Super Benefits (e.g. they have Retired or turned 65) plus they must be eligible to contribute into their SMSF. Typically the strategy will involve the Member withdrawing all or part of their Taxable Component after the age of 60 (when super withdrawals are tax free) from their SMSF Bank Account and transferring it to their personal Bank Account. The Member will in turn "recontribute" the withdrawal back into the SMSF Bank Account in the next day or later. The "recontribution" must be within the contributions limits allowed and subject to the $1.6 million eligibility threshold.
The primary objective of this popular strategy is to convert all or part of a Member's Taxable Component into a Tax Free Component. It is important to understand that the Member's Super Benefit must be physically transferred from the SMSF Bank Account to a personal Bank Account. The amount must in turn be transferred back to the SMSF Bank Account as a Non Concessional Contribution. An accounting entry is not sufficient. There must be a debit and corresponding credit within the SMSF's Bank Account. A "Recontribution Strategy" can be undertaken whether the Member has commenced a Pension or not. It is also important to understand that you cannot simply withdraw only the Taxable Component of your Super Benefit. Your Super Benefit must be withdrawn in the same proportion as the Tax Free and Taxable Components of the Member's Super Benefit in the SMSF as required under the "Proportioning Rule".
In the above example, Barney who is 61 years of age decides to access all his Super Benefit of $300,000 by transferring it to his personal bank account. The withdrawal is totally Tax Free as Barney is over 60. Barney in turn "recontributes" his Super Benefit back into his SMSF the next day. Under the "3 Year Bring Forward Rule" Barney is able to make a one off contribution of up to $300,000, so contributing his $300,000 back into the SMSF causes no tax issues. The above "Recontribution Strategy" now means that Barney's Super Benefit is totally made up of a Tax Free Component as the contributions have been sourced totally from his one-off Non Concessional Contribution under this strategy. On Barney's death his Super Benefit is received by his son Barney Junior who is aged 30 and is not a Financial Dependent. Barney's son will now not be taxed on the Tax Free Component of $300,000. Given there is no Taxable Component, the Super Benefit is now passed to Barney Junior completely tax free! A savings of $37,500 in tax!
Other Strategies to minimise tax to Non Dependants on death are detailed here.