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Income Tax Calculation


As part of the annual reporting requirements of an SMSF, an Income Tax Return must be prepared and lodged with the ATO. The Tax Return indicates the tax liability or refundable amount. ESUPERFUND attends to the Annual Compliance requirements of the SMSF and once completed, the Annual Compliance Documentation will be available for your review and signing.

The following provides you with an overview of the tax payable/refundable calculation as per detailed on the annual Income Tax Return:

 
 
Assessable Income

Capital Gains/Losses

Capital Gain/Loss is the difference between the proceeds received when you dispose of an asset and its cost base.

Your SMSF makes a Capital Gain if the proceeds exceed the cost base.

Your SMSF makes a Capital Loss if the proceeds are less than the cost base.

Net Capital Loss

If the Total Capital Loss exceeds the Total Capital Gains, your SMSF makes a Net Capital Loss.

Importantly, the Net Capital Loss cannot be deducted from other assessable income. The Net Capital Loss may be carried forward to later income years to be deducted from the Capital Gains. There is no time limit on how long you can carry forward a Net Capital Loss.


Net Capital Gain

If the Total Capital Gain exceeds the Total Capital Loss, your SMSF makes a Net Capital Gain. The Net Capital Gain is included as assessable income in the annual Income Tax Return.


Discount on Capital Gains

If an asset was held for over 12 months, the SMSF may be eligible for a discount of 1/3 on the Capital Gains.

Example:

Assume the following share disposals occurred during the 2018 Financial Year:

Share Purchase Date Cost Base Disposal Date Proceeds Capital Gain/Loss
A 10/09/2017 $10,000 10/05/2018 $12,500 $2,500
B 23/07/2014 $2,000 05/04/2018 $5,500 $3,500
C 01/07/2017 $3,200 20/06/2018 $2,800 -$400

The Total Capital Gains for the above-listed transactions are $6,000 ($2,500 from disposal of Share A and $3,500 from Share B). It should be noted that Share B was held for over 12 months and therefore, the SMSF is eligible for a discount of 1/3 on the Capital Gains.

Total Capital Loss is $400 from the disposal of Share C.

Net Capital Gain assessable = $2,500 + $2,333 (after applying a discount of 1/3 on Share B capital gains) - $400 = $4,433.

Concessional Contributions

Concessional Contributions include the following contribution types:

  • Employer Contributions
  • Salary Sacrifice Contributions
  • Personal Contributions where a tax deduction is claimed

Concessional Contributions are taxed at the rate of 15% in the SMSF, irrespective of whether the SMSF has commenced a Simple Account Based Pension.

For more details on Concessional Contributions, please visit our website here.

Dividends and Distributions

Dividends are received from your SMSF’s investments in companies shares. The gross dividend amount (i.e. Franked amount + Unfranked amount + Franking Credits) is assessable income for the SMSF. Dividends are recorded on a cash basis, that is, based on the dividend payment or reinvestment date.

Distributions are most commonly associated with Listed Trusts (For example, ETFs) or Managed Funds. The distributions received may contain different types of income and these are detailed on an Annual Tax Statement issued by the Trusts or Managed Funds. The distribution components are recorded in the SMSF’s Annual Tax Return according to the Annual Tax Statements.

Foreign & Franking Credits Offset

It should be noted that any franking credits or foreign credits detailed on the Dividends or Distributions statements are required to be included as Assessable Income. The franking credits and foreign credits may then be claimed as offsets to reduce the Gross Tax.

Interest, Rental Income

Other common assessable income for an SMSF includes interest received from Bank, Savings or Term Deposit accounts.

If the SMSF holds a property and receives rental income, this is also included as Assessable Income for the SMSF.

Exempt Current Pension Income

If you have commenced a Retirement Phase Pension within the SMSF, the investment earnings and realised capital gains earned from the assets supporting the Retirement Phase Pension are tax exempt (subject to the Transfer Balance Cap).

You have a Retirement Phase Account in the SMSF when:

  • Your Super Benefit is transferred to the Retirement Phase Account by commencing a Simple Account Based Pension (SABP), including a Death Benefit Pension;
  • You have commenced a Transition to Retirement Income Stream previously and the TRIS has subsequently entered the Retirement Phase when you turned age 65 or have retired/permanent incapacity/terminal illness and notified the Trustees (R-TRIS).

You have a Non-Retirement Phase Account in the SMSF when:

  • You have a balance in the Accumulation Account, which occurs under the following situations:
    1. You have Super Benefits in the SMSF but have not commenced a Pension;
    2. You have made additional contributions or rollovers into the SMSF after commencing a Pension;
    3. You have rolled back your balance in the Retirement Phase Pension into the Accumulation Account.
  • You have commenced a Transition to Retirement Income Stream (TRIS) and you are still under age 65 and not retired.

The Retirement Phase and Non-Retirement Phase 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 the income and realised capital gains made during the financial year between your "Retirement Phase Account" and "Non-Retirement Account" on a proportional basis in the accounting records of your SMSF. No action is required from you. The proportion associated with the Retirement Phase Accounts are claimed as “Exempt Current Pension Income” on the SMSF tax return and it reduces your Total Assessable Income.

Total Assessable Income

The total assessable income is the sum of all the income less your Exempt Current Pension Income.

 
 
Deductions

Deductible Expenses

Some expenses incurred by the SMSF may be tax-deductible to the SMSF. Examples of common deductible expenses include:

  • ESUPERFUND Annual Compliance fee

    The ESUPERFUND Annual Compliance fee to attend to the taxation and accounting obligations of the SMSF including the audit is tax deductible.

  • ATO Supervisory Levy

    The ATO charges an annual supervisory levy and the levy is payable by all SMSFs upon the lodgement of the Annual Tax Return with the ATO. The levy paid by your SMSF is tax deductible in the year the payment is made to the ATO.

    For example, if your SMSF is a newly registered SMSF in the 2018 Financial Year, your SMSF is required to pay $518 as supervisory levy to the ATO upon the lodgement of the 2018 Annual Tax Return. The payment made is then tax deductible in the 2019 Financial Year Tax Return.

    For more details on the SMSF supervisory levy, please refer to our website here.

  • Insurance Premiums

    If the SMSF has arranged insurance cover (Life Insurance, Total & Permanent Disability Insurance, Income Protection insurance) for its members, the insurance premiums paid by the SMSF are tax deductible.

    For more details on Insurance within the SMSF, please visit our website here.

Non-Deductible Expenses

It should be noted that some costs incurred by the SMSF are not tax deductible. Examples are:

  • Company Set-Up Fee

    If your SMSF has a corporate trustee structure, the fee incurred in setting up the corporate trustee company is capital in nature and is therefore not deductible to the SMSF.

  • Brokerage Fees

    Brokerage charges incurred when purchasing or disposing of shares are not tax deductible to the SMSF. They are capital in nature and are therefore added to the cost base of the shares.

  • Property Purchase Costs, Initial Repairs and Renovations

    Costs associated with the property purchase such as solicitor’s fees, stamp duty, or pest and building inspections are capital in nature and are therefore not tax deductible.

    Additionally, if your SMSF pays for initial repairs or to renovate the property, the costs incurred will be added to the cost base of the property. They cannot be claimed as deductions.

Expenses when the SMSF has commenced a Retirement Phase Pension.

As detailed above, the investment earnings and realised capital gains earned from the assets supporting the Retirement Phase Pension are tax exempt. The expenses incurred in gaining or producing the exempt income are not allowable deductions.

 
 
Taxable Income

The Taxable Income is calculated as:

Taxable Income = Total Assessable Income – Total Deductions

The SMSF’s income is taxed at a concessional rate of 15%. Therefore, the gross tax is calculated as:

Gross Tax = Taxable Income x 15%.

 
 
Tax Offsets

Franking Credits Tax Offset

If the SMSF receives dividends or distributions with Franking Credits attached, the SMSF may claim a Franking Credits tax offset. If the Franking Credits tax offset is not fully utilised to reduce the Gross Tax, your SMSF will receive a refund of the unused portion of the tax offset amount.

Foreign Income Tax Offset

The SMSF may be able to claim a Foreign Income Tax Offset where it has paid foreign income tax on an amount included in its Assessable Income. The Foreign Tax Credits are usually detailed on the Dividends Statements or Distributions Annual Tax Statements.

The Foreign Income Tax offset will reduce the SMSF’s Gross Tax.

However, if the total of the Foreign Tax Offset is greater than the Gross Tax, the excess is non-refundable and cannot be carried forward.

TFN Tax Credit

If tax was withheld from the interest, dividends or distributions entitlements of the SMSF because the SMSF did not quote its TFN, the associated TFN Tax Credits will be claimed in the SMSF’s Tax Return. The amount is used to offset the tax payable and any excess will be refunded.

 
 
PAYG Instalments

PAYG instalment is an estimate made by the Australian Taxation Office based on your SMSF’s previous years’ assessment and is essentially a prepayment of your SMSF‘s tax liability for the current Financial Year.

If your SMSF was required to pay PAYG instalments, the PAYG instalment amount will be included in the tax return and credited against the actual tax liability.

For more details on PAYG instalments, please visit our website here.

 
 
ATO Supervisory Levy

The ATO charges an annual Supervisory Levy and the levy is payable by all SMSFs upon the lodgement of the Annual Tax Return with the ATO.

For more details on the SMSF supervisory levy, please refer to our website here.

 
 
Net Payable Amount

The Net Payable or Refundable Amount is calculated as

Net Payable or Refundable Amount = Gross Tax – Tax Offsets – PAYG instalments + ATO levy

Our office will notify you of the net payable or refundable amount once the Annual Compliance documentation has been prepared by us. We will also provide you with the relevant BPAY details if your tax return results in a tax liability to be paid to the ATO.

 
 
Summary

  Details
Assessable Income Concessional Contributions + Capital Gains + Interest + Rental Income + Other Assessable Income – Exempt Current Pension Income
Deductions Deductible Expenses
Gross Tax = 15% * Taxable Income 15% * (Assessable Income – Deductions)
Less Tax Offsets Franking Credits Tax Offsets + Foreign Credits Tax Offset + TFN Tax Credits
Less PAYG instalments paid in advance PAYG instalment amount for the financial year
Add ATO Supervisory levy $518 (if first year tax return) /
Net Payable/Refundable Amount Gross Tax – Tax offsets – PAYG instalments + ATO levy

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