Questions & Answers - Tax

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

0%. Personal Contributions made into an 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 information on Non Concessional Contributions, please click here. No tax is ever payable on a Non Concessional Contribution made into an SMSF either when the monies are contributed into the SMSF or when monies are accessed later on retirement.

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:

Tax is payable on Concessional Contributions made into an SMSF at the rate of 15%. For more information on Concessional Contributions, please click here.

There are Contributions limits for Non Concessional Contributions which are detailed here. It is important never to breach these limits, otherwise, penalty taxes apply.

To the extent you make a Non Concessional Contribution exceeding your Non Concessional Contribution Limit, the ATO will contact you by sending you a Determination letter after the lodgement of your SMSF Annual Return. You will be asked to choose how your Excess Non Concessional Contributions are taxed. You have the following options:

Option 1 Release the excess amounts from your SMSF

If you choose this option, you are electing to withdraw all your Excess Non Concessional Contributions and 85% of associated earnings from your SMSF. In this case, the Excess Non Concessional Contributions will NOT be subject to Excess Non Concessional Contributions tax. However the full associated earnings amount stated in the determination is added to your assessable income and taxed at your marginal tax rates subject to a 15% tax offset.

To select this option, you need to make an election using ATO online services or complete the excess non-concessional contributions election form and send it to the ATO. Generally, you have 60 days after the date of issue of the determination to make an election.

Once the ATO processed your election, they will send a release authority form to the superfunds you nominated. You will have 20 business days to action a release authority which includes paying the amount stated in the release authority and completing the release authority to send it back to the ATO. Importantly the amount should only be released after the release authority is received.

Please note that a copy of the completed release authority is required to be provided to our office via the annual checklist for audit purposes.             

Option 2 Pay Excess Non Concessional Contributions tax on the excess amount

If you choose not to release your Excess Non Concessional Contributions from your SMSF, the Excess Contributions over the Non Concessional Contribution Limit will be subject to Excess Contributions Tax at the highest marginal tax rate of 47%.The excess non-concessional contributions tax will need to be paid from your super.

Excess Contributions Tax can result in double taxation, with an effective tax rate of up to 94%! To avoid this situation, it is vital that you keep track of all your Non Concessional Contributions.

To select this option, you need to make an election using ATO online services or complete the excess non-concessional contributions election form and send it to the ATO. Generally, you have 60 days after the date of issue of the determination to make an election.

Once the ATO processed your election, they will send a release authority form to the superfunds you nominated. You will have 20 business days to action a release authority which includes paying the amount stated in the release authority and completing the release authority to send it back to the ATO. Importantly the amount should only be released after the release authority is received.

Please note that a copy of the completed release authority is required to be provided to our office via the annual checklist for audit purposes.

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 added to your personal taxable income and taxed at your personal marginal tax rate with a 15% tax offset to account for the contributions tax already paid by your SMSF. You will need to pay this additional tax from your personal account. If you exceeded your Concessional Contribution Limit prior to 1 July 2021, you would also need to pay an interest charge calculated by the ATO known as the excess concessional contributions (ECC) charge.

To the extent your Concessional Contributions exceeded your Concessional Contribution Limit, the ATO will contact you by sending you a Determination letter and a Notice of Assessment after the lodgement of your SMSF Annual Return. You will be asked to choose whether you want to release the Excess Concessional Contributions from your SMSF. You have the following options:

Option 1 Leave the excess concessional contributions in your SMSF

If you choose this option, you are choosing not to release any amount from your SMSF. The excess concessional contributions will be counted towards your non-concessional contributions cap. We caution that this may in turn cause you to exceed your non-concessional contributions cap. For more information about excess non-concessional contributions, please click here.

Option 2 Release up to 85% of the excess concessional contributions from your SMSF

If you choose to release your Excess Concessional Contributions from your SMSF, the amount released from your SMSF can be used to help pay the tax on your excess concessional contributions and the released amount will not count towards your non-concessional contributions cap.

To select this option, you need to make an election specifying the amount you wish to release via ATO online services or complete the excess concessional contributions election form and send it to the ATO. Generally, you have 60 days after the date of issue of the determination to make an election and the election is irrevocable.

Once the ATO processed your election, they will send a release authority form to the superfunds you nominated. You will have 20 business days to action a release authority which includes paying the amount stated in the release authority and completing the release authority to send it back to the ATO. Importantly the amount should only be released after the release authority is received.

Please note that a copy of the completed release authority is required to be provided to our office via the annual checklist for audit purposes.

It is important to understand that every Member has two accounts in an 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 Member's "Accumulation Account" and "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 Member's Accumulation and Pension Accounts on a proportional basis. This percentage is constantly changing during the financial year and is tracked by ESUPERFUND. 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 Member Account on a proportional basis. Income includes dividends, interest and rent from the property. Realised capital gains are gains from the sale of assets like shares and property. It is important to remember that unrealised capital gains (i.e. from assets that have appreciated in value but have not been sold) are never subject to tax until sold.

Conversely the tax rate that applies to the income and realised capital gains allocated to the Member's "Retirement Phase Pension (SABP or R-TRIS)" is 0%. For more information on how tax is calculated on the SABP Account and Accumulation/TRIS Accounts click here.

Yes. Given that there is no tax payable on SMSF income (including dividends) after all SMSF Members have commenced a Retirement Phase Pension (SABP or R-TRIS), 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 Retirement Phase Pension (SABP or R-TRIS), the entire 30% tax paid is Refundable to your SMSF.

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.

Nil. The Pension Income that is paid to you by the SMSF each year after you commence a Pension (SABP or TRIS) is tax free after you have turned 60.

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 Member's marginal tax rate less a 15% "Pension Rebate". As a general rule of thumb, assuming that the Pension is the Member's 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.

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 (i.e. $20,000). The Pension withdrawn of $20,000 will be 80% tax free (i.e. $16,000) and 20% taxable (i.e. $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.

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

Preservation Age

Generally, you must reach preservation age before you can access your super. Use the following table to work out your preservation age.

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.

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.

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.

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 2021-2022 financial year. In this case 80% of the withdrawal amount 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 $225,000 of your Taxable Component is tax free.
• The Taxable Component above $225,000 is taxed at 17%

In the above example as the taxable portion of the Lump Sum of $20,000 is less than $225,000, it is tax free.

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:

If you have NOT commenced a Pension from your SMSF all withdrawals made from your SMSF will be treated as a Lump Sum withdrawal when aged between preservation age and 59 and “Retired”. Alternatively, if you have commenced a Pension from your SMSF, you have the choice to make either Pension or Lump Sum withdrawal in addition to the annual minimum pension amount, which must be made as Pension withdrawals.

We caution that pension withdrawals and lump sum withdrawals are two different withdrawal types and different rules apply. For more information on the difference between pension withdrawals and lump sum withdrawals, please click here.

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