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Questions & Answers - Tax


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+ What Tax does my SMSF pay?

A summary of the Tax that is payable in a SMSF is detailed here.

+ What Tax is payable on Non Concessional Contributions?

0%. Personal Contributions made into a SMSF on which no tax deduction is claimed are known as Non Concessional Contributions. Non Concessional Contributions are essentially personal contributions made into your SMSF from your own personal account and not from your Employer. For more details on Non Concessional Contributions click here. No tax is ever payable on a Non Concessional Contribution made into a SMSF either when the monies are contributed into the SMSF or when monies are accessed later on retirement.

+ What Tax is payable on Concessional Contributions

15%. Concessional Contributions are contributions where a tax deduction has been claimed for the contribution, either by the Member or by an Employer. Concessional Contributions include the following subsets of contribution types:

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    Mandated Employer Contributions
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    Salary Sacrifice Contributions
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    Personal Contributions where a tax deduction is claimed.

Tax is payable on Concessional Contributions made into a SMSF at the rate of 15%. For more details on Concessional Contributions click here.

+ What Tax is payable on Excessive Non Concessional Contributions?

There are Contributions limits for Non Concessional Contributions which are detailed here. It is important never to breach these limits otherwise penalty taxes apply. That is to the extent you make a Non Concessional Contribution exceeding your Non Concessional Contribution limit, your SMSF must return the excess contribution to the contributing Member within 30 days of receiving the contribution. To the extent that this does not occur, your SMSF will be liable for Excess Contributions Tax.

If you exceed your Non Concessional Contribution Limit before 1 July 2014, the Excess Contributions over the Non Concessional Contribution Limit will be subject to Excess Contributions Tax of 46.5%. This can result in double taxation, with an effective tax rate of 93%!

If you exceed your Non Concessional Contribution Limit after 1 July 2014, the Excess Contributions over the Non Concessional Contribution Limit will be subject to Excess Contributions Tax of 49%. This can result in double taxation, with an effective tax rate of 98%!

To avoid this disastrous situation, it is vital that you keep track of all your Non Concessional Contributions.

+ What Tax is payable Excessive Concessional Contributions?

It should be noted that there are Contributions limits for Concessional Contributions as detailed here. It is important never to breach these limits otherwise penalty taxes apply

If you exceed your Concessional Contribution Limit, the Excess Contributions over the Concessional Contribution Limit will be taxed at your actual marginal tax rate, plus an interest charge calculated by the ATO (as would happen for income tax paid late to the ATO), rather than the top marginal tax rate. If you're already on the top marginal tax rate, you only need to pay the interest charge.

To avoid the above disastrous situation it is vital that you keep track of all your Concessional Contributions, noting that Contributions are regarded as being paid at the time they are received by the fund.

It is noted in the first year of your SMSF establishment, the SMSF must lodge its tax return by 28 February following the end of the Financial Year. In the second year and future years the SMSF must lodge its tax return by 15 May following the end of the Financial Year.

+ What tax is payable on Income and Realised Capital Gains in a SMSF?

It is important to understand that every Member has two accounts in a SMSF. These Accounts are "Accumulation Account" and "Pension Account" (more about Pensions can be found here). These accounts are simply "Accounting Accounts" and not actual physical bank accounts. Accordingly whilst your actual Super Benefit will be invested in a range of assets including cash and shares, ESUPERFUND will allocate your Super Benefit between "Accumulation Account" and "Pension" in the accounting records of your SMSF.

ESUPERFUND tracks each Members "Accumulation Account" and a "Pension Account" as part of the annual compliance process. No action is required by you. ESUPERFUND will determine what portion of the SMSF belongs to each Member and in turn what portion of the Member Account belongs to each respective Members Accumulation and Pension Accounts on a proportional basis. This percentage is constantly changing during the financial year and is tracked by ESUPERFUND. Importantly as part of the annual compliance process ESUPERFUND will prepare a Member Statement for each Member of the SMSF. This is a legal requirement. The Member Statements are included in the annual compliance documents completed for clients and must be approved by you as the SMSF Trustee before lodgement with the ATO.

As part of the annual compliance process ESUPERFUND will determine the income and realised capital gains made during the financial year by the SMSF. These are in turn allocated to each Members Pension and Accumulation Accounts on a proportional basis. Income includes dividends, interest and rent from property. Realised capital gains are gains from the sale of assets like shares and property. It is important to remember that unrealised capital gains (ie from assets that have appreciated in value but have not been sold) are never subject to tax until sold.

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    Income will be subject to tax at 15%
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    Realised Capital Gains will be subject to tax at 15% if the asset is held less than 12 months
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    Realised Capital Gains will be subject to tax at 10% if the asset is held more than 12 months

Conversely the tax rate that applies to the income and realised capital gains allocated to the Members "Pension Account" will be taxed is 0%. For more information on how tax is calculated on the Pension and Accumulation Accounts click here.

We caution that significant changes will apply to the tax treatment for Simple Account Based Pension (SABP) and Transition to Retirement Pension (TRAP) from 01 July 2017 due to the recent Super Reforms. Please click here for the changes to Simple Account Based Pension (SABP) and here for the changes to Transition to Retirement Pension (TRAP).

+ Does my SMSF receive a Refund for Franking Credits paid when I commence a Pension?

Yes. Given that there is no tax payable on SMSF income (including dividends) after all SMSF Members have commenced a Pension, your SMSF is entitled to receive any franking credits on Australian Share dividends in cash from the ATO. Franking Credits simply represent tax paid by Australian companies on dividends your SMSF is receiving. Given that the company has paid 30% tax and your SMSF tax rate on dividends is Nil when all SMSF Members have commenced a Pension, the entire 30% tax paid is Refundable to your SMSF. Example: For every $10,000 received in fully franked dividend income, your SMSF receives $4,285 as a cash Refund from the ATO each and every year the dividends are paid, after all SMSF Members have commenced a Pension!

We caution that significant changes will apply to the tax treatment for Simple Account Based Pension (SABP) and Transition to Retirement Pension (TRAP) from 01 July 2017 due to the recent Super Reforms. Please click here for the changes to Simple Account Based Pension (SABP) and here for the changes to Transition to Retirement Pension (TRAP).

+ When is Tax Payable on SMSF Income and Realised Capital Gains?

Tax is only payable on SMSF income and realised capital gains on the completion and lodgement of the SMSF annual tax return. It is noted in the first year your SMSF is setup the SMSF must lodge its tax return by 28 February following the end of the Financial Year. In the second year and future years the SMSF must lodge its tax return by 15 May following the end of the Financial Year.

+ What Tax is payable on Pension Withdrawals when aged over 60?

Nil. The Pension Income that is paid to you by the SMSF each year after you commence a Simple Account Based Pension or TRAP is tax free after you have turned 60.

+ What Tax is payable on Pension Withdrawals when aged between Preservation Age and 59?

This depends on the amount of the Pension. Your 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. Any Pension Withdrawals 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".

Under the "Proportioning Rule" and where the Member is aged between Preservation Age and 59, the "Tax Free" Component of the Pension withdrawal is tax free. The "Taxable" Component of the Pension withdrawal is taxed at the Members marginal tax rate less a 15% "Pension Rebate". As a general rule of thumb, assuming that the Pension is the Members sole source of income, then the Member can generally take approximately $40,000 per annum as Pension income tax free. Some tax may apply on Pension income drawn above this amount.

Preservation Age

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 Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 01 July 1964 60

Example:

As an example assume you have a Super Benefit of $500,000 made up as follows:

  • "Tax Free" Component: $400,000
  • "Taxable" Component: $100,000
  • Total Super Benefit: $500,000

In this example your "Tax Free" percentage is 80% ($400,000 / $500,000) and your "Taxable" percentage is 20% ($100,000 / $500,000). Under the "Proportioning Rule" this means that 80% of your Pension withdrawals will be tax free and 20% will be taxable where the pension withdrawals are made between Preservation Age and 59.

Assume you draw the minimum pension of 4% per annum on your $500,000 Super Benefit (ie $20,000). The Pension withdrawn of $20,000 will be 80% tax free (ie $16,000) and 20% taxable (ie $4,000). In addition you will be allowed a 15% "Pension Rebate" on the taxable portion of the Pension withdrawn, further reducing your tax liability.

In the above example assuming you are on the 34.50% personal marginal tax rate, you would be assessable on the $4,000 taxable portion of the Pension withdrawn at 34.50%, resulting in $1,380 in tax. Given you also receive a 15% "Pension Rebate" on the taxable portion of the Pension withdrawn of $4,000 (i.e. 15% of $4,000 or $600), the tax liability is further reduced to only $780. This means you pay tax of $780 on a $20,000 Pension withdrawal in the above example.

+ How is Tax calculated on Pension Withdrawals when aged between Preservation Age and 59?

The process to calculate the tax on Pension Withdrawals paid to a Member who is aged between Preservation Age and 59 is as follows:

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    Step 1: Determine the Tax Free Component of your Super Benefit
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    Step 2: Determine the Taxable Component of your Super Benefit
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    Step 3: The Total of the Taxable and Tax Free Components make up your Total Super Benefit
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    Step 4: Calculate the Tax Free Component percentage equal to Note 1 divided by Note 3
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    Step 5: Calculate the Taxable Component percentage equal to Note 2 divided by Note 3
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    Step 6: Multiply the Pension Payment by the Tax Free percentage at Note 4. The result is Tax Free.
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    Step 7: Multiply the Pension Payment by the Taxable percentage at Note 5. The result is taxed at the Members tax rate less a 15% Pension Rebate.

Preservation Age

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 Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 01 July 1964 60
+ What Tax is payable on Lump Sum Withdrawals when aged over 60?

Nil. A Lump Sum Withdrawal is simply an amount accessed from your SMSF that is not a Pension Payment. You can make lump sum withdrawals whenever you like from your SMSF once you turn 65 or alternatively when you are aged between Preservation Age and 64 and are "Retired". You cannot make Lump Sum Withdrawals if you are under 65 if you are NOT Retired. Lump Sum Withdrawals accessed after the age of 60 are tax free.

+ What Tax is payable on Lump Sum Withdrawals when aged between Preservation Age and 59?

This depends on the amount of the Lump Sum Withdrawal made. Your 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. Any Lump Sum Withdrawals 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".

Under the "Proportioning Rule" and where the Member is aged between Preservation Age and 59, the "Tax Free" Component of the Lump Sum withdrawal is tax free. The "Taxable" Component of the Lump Sum withdrawal is taxed as follows:

  • The amount up to the low rate cap amount is tax free.
  • The amount above the low rate cap amount is taxed at 17%

Preservation Age

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 Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 01 July 1964 60

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.

Income Year Amount of cap
2016–17 $195,000
2015–16 $195,000
2014–15 $185,000

Example:

As an example assume you have a Super Benefit of $500,000 made up as follows:

  • "Tax Free" Component: $400,000
  • "Taxable" Component: $100,000
  • Total Super Benefit: $500,000

In this example your "Tax Free" percentage is 80% ($400,000 / $500,000) and your "Taxable" percentage is 20% ($100,000 / $500,000). Under the "Proportioning Rule" this means that 80% of your Lump Sum withdrawals will be tax free and 20% will be taxable where the Lump Sum withdrawals are made between Preservation Age and 59.

Assume you decide to access $100,000 as a lump sum withdrawal and are eligible to do so in 2016-2017 financial year. In this case an amount of 80% will be tax free and the balance will be taxable, namely 20% of the $100,000 or $20,000. The $20,000 assessable amount is then taxed as follows:

  • The First $195,000 of your Taxable Component is tax free.
  • The Taxable Component above $195,000 is taxed at 17%

In the above example as the taxable portion of the Lump Sum of $20,000 is less than $195,000, it is tax free. If you are contemplating large lump sum withdrawals before age 60 and the taxable portion of the Lump Sum is above $195,000, then it may be prudent to defer accessing larger lump sum withdrawals until age 60 when the lump sum withdrawals are tax free.

+ How is Tax Calculated on Lump Sum Withdrawals when aged between Preservation Age and 59?

The process to calculate the tax on Lump Sum Withdrawals paid to a Member who is aged between Preservation Age and 59 is as follows:

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    Step 1: Determine the Tax Free Component of your Super Benefit
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    Step 2: Determine the Taxable Component of your Super Benefit
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    Step 3: The Total of the Taxable and Tax Free Components make up your Total Super Benefit
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    Step 4: Calculate the Tax Free Component percentage equal to Note 1 divided by Note 3
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    Step 5: Calculate the Taxable Component percentage equal to Note 2 divided by Note 3
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    Step 6: Multiply the Lump Sum Withdrawal by the Tax Free percentage at Note 4. The result is Tax Free.
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    Step 7: Multiply the Lump Sum Withdrawal by the Taxable percentage at Note 5. The result is taxed at:
    • The amount up to the low rate cap amount is tax free
    • The amount above the low rate cap amount is taxed at 17%
+ Can you choose to take withdrawals from a SMSF as a Pension or Lump Sum when aged between Preservation Age and 59?

When you are aged over 60 all withdrawals, whether they are Pension or Lump Sum withdrawals are tax free. However when aged between Preservation Age and 59 Pension and Lump Sum withdrawals may be subject to tax and the tax will differ depending on the withdrawal type you make.

Given the difference in the taxation treatment when accessing monies from your SMSF as a Pension or Lump Sum when you are aged between Preservation Age and 59, it is sometimes preferable to treat withdrawals as a combination of both a Pension and Lump Sum, rather than solely as a Pension, once you commence a Simple Account Based Pension between Preservation Age and 59. It is important to understand that if you have commenced a Simple Account Based Pension it means you are retired and this is a precondition to being able to take Lump Sum withdrawals.

Remember your Super Benefit is made up of two components, namely Tax Free Component and 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.

Any withdrawals 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". Under the "Proportioning Rule" and where the Member is aged between Preservation Age and 59, the "Tax Free" Component of the withdrawal is tax free. The "Taxable" Component of the withdrawal is taxed differently depending on whether it is a Lump Sum or a Pension. That is the "Taxable" Component of the Pension withdrawal is taxed at the Members marginal tax rate less a 15% "Pension Rebate". Alternatively the “Taxable” amount up to the low rate cap amount of a Lump Sum withdrawal is tax free and the balance above the low rate cap amount is taxed at 17%.

Preservation Age

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 Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
From 01 July 1964 60

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.

Income Year Amount of cap
2016–17 $195,000
2015–16 $195,000
2014–15 $185,000

Example:

Barney is 58 and has a Super Benefit of $1,000,000 made up as follows:

  • "Taxable" Component: $800,000
  • "Tax Free" Component: $200,000
  • Total Super Benefit: $1,000,000

In the above example this means that 80% ($800,000 / $1,000,000) of Barney's Super Benefit is taxable and $20% ($200,000 / $1,000,000) is tax free. Barney commences a Simple Account Based Pension on 1 July and must access 4% of his Super Benefit as a Pension (ie $40,000).

Assume Barney decides to access $150,000 from his SMSF in the 2016-2017 Financial Year. If the entire amount was treated as a Pension withdrawal, Barney would pay a whopping $16,747 in tax. That is he would be taxed on 80% of the Pension Income of $150,000 (ie $120,000). Tax on $120,000 is $34,747. After applying a 15% "Pension Rebate" of $18,000 ($120,000 x 15%) the net tax payable is $16,747. If Barney alternatively had chosen to take the Minimum Pension of $40,000 only and treat the additional withdrawal of $110,000 as a Lump Sum Withdrawal, the tax result would be completely different.

That is on the $40,000 Pension withdrawal, Barney would be taxed on 80% of the Pension Income (ie $32,000). Tax on $32,000 is $2,817. After applying a 15% "Pension Rebate" of $4,800 ($32,000 x 15%) the net tax payable is $0. It is noted that if the Pension Rebate creates a refund the refund is lost.

On the remaining $110,000 Lump Sum withdrawal, Barney would be taxed on 80% of the Lump Sum Withdrawal (ie $88,000). Given that Barney can access the first $195,000 (i.e. the low rate cap amount for the 2016/2017 Financial Year) in Lump Sum withdrawals tax free, the entire $110,000 would be tax free.

This means that Barney's withdrawal of $150,000 is now completely tax free (ie a Pension Withdrawal of $40,000 that is tax free plus a Lump Sum Withdrawal of $110,000 that is tax free). This simple strategy has saved Barney $16,747.

+ What Expenses are Tax Deductible?

Expenses of the SMSF including accounting fees are tax deductible to the SMSF and will reduce the tax liability of the SMSF. For more details of expenses that can be paid and claimed as an expense in the SMSF click here.