Taxation of Income and Realised Capital Gains in the SMSF after you commence a Retirement Phase Pension
As previously detailed the SMSF tax rate reduces to NIL on all income and realised capital gains made by your SMSF, when you commence a Retirement Phase Pension.
This means that all income and realised capital gains on your share of the SMSF, after the Retirement Phase Pension has commenced will be tax free. However the amount of superannuation benefits that you can use to commence a Retirement Phase Pension is limited by the Transfer Balance Cap.
For more information on how the Transfer Balance Cap works, please click here.
It is important to continuously track each Member's Benefit in the SMSF to determine which part of the SMSF is in the tax-free retirement phase and which part is not given the different taxation implications that apply. This is explored further below.
Taxation of Income and Realised Capital Gains in the SMSF after you commence a TRIS
As previously detailed the tax exemption on earnings from assets supporting TRIS has been removed from 01 July 2017. This means that all income and realised capital gains on your share of the SMSF will still be taxed at a rate of up to 15%, which is taxed in a similar way as Accumulation accounts. This is also the case even if you commenced the TRIS before 01 July 2017.
Member Accumulation Account and Pension Account
Every Member has two accounts in an SMSF.
These Accounts are an "Accumulation Account" and a "Pension Account". For more information on Pensions, please click here. These accounts are "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 your "Accumulation Account" and "Pension Account" in the accounting records of your SMSF.
Allocating Contributions and Rollovers to the Member Accumulation and Pension Accounts
All contributions and rollovers made to your SMSF will automatically be allocated to your "Accumulation Account". When you commence a Pension in your SMSF, your Super Benefit is transferred from your "Accumulation Account" and recorded in your "Pension Account". Unlike Retail Funds, after commencing a Pension an SMSF can continue to accept contributions (subject to the normal contributions rules) and rollovers. These contributions and rollovers continue to be made to the Transaction Bank Account setup for your SMSF. When you make additional contributions and rollovers to your SMSF these contributions and rollovers are allocated to your "Accumulation Account" even if you have commenced a Pension. They cannot be added to your "Pension Account" directly.
Example:
Barney is 60 & retired and commences an SMSF. He rolls over his Super Benefit from his current Superfund totalling $190,000. Barney's spouse Lisa is also a Member of the SMSF and she is not retired. Lisa makes a personal Non Concessional Contribution into the SMSF totalling $100,000. The rollover and contributions are made to the same Transaction Bank Account established for their SMSF by ESUPERFUND. An amount of $250,000 is in turn invested in shares and the balance of $40,000 is left in cash.
In the above example ESUPERFUND will allocate the rollover of $190,000 to Barney's Accumulation Account. Similarly ESUPERFUND will allocate the contribution made by Barney's Spouse Lisa of $100,000 to her Accumulation Account. These are "Accounting Entries" only. This means that the actual investments remain in cash and shares as detailed above.
Barney in turn decides to commence an SABP and he is still within his Transfer Balance Cap. In this case ESUPERFUND will transfer the balance from his Accumulation Account to his SABP Account. After the commencement of the SABP, Barney makes a personal contribution into the SMSF of $10,000 which Barney leaves in the Transaction Bank Account which now has a balance of $50,000. The personal contribution of $10,000 will be allocated to Barney's Accumulation Account. Lisa also decides to commence a TRIS and the balance in her Accumulation Account is transferred to her TRIS Account. At that time the SMSF will look as follows:
| SMSF Assets |
$ |
| SMSF Shares |
$250,000 |
| SMSF Cash |
$50,000 |
| Total |
$300,000 |
| Member Accounts |
$ |
| Barney - SABP Account |
$190,000 |
| Barney - Accumulation Account |
$10,000 |
| Lisa - TRIS Account |
$100,000 |
| Lisa - Accumulation Account |
$0 |
| Total |
$300,000 |
Tracking Member Accumulation and Pension Accounts
ESUPERFUND tracks each Members "Accumulation Account" and "Pension Account" as part of the annual compliance process. No action is required from 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. 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.
Example:
In our earlier example Barney has contributed $200,000 or 66.66% of the monies to the SMSF so he will own 66.66% of the SMSF assets. Barney's Spouse Lisa has contributed $100,000 to the SMSF or 33.33% of the monies so she will own 33.33% of the SMSF assets. Their Member Accounts are further tracked on a proportional basis as follows:
| Member Accounts |
$ |
% |
| Barney - SABP Account |
$190,000 |
63.33% |
| Barney - Accumulation Account |
$10,000 |
3.33% |
| Lisa - TRIS Account |
$100,000 |
33.33% |
| Lisa - Accumulation Account |
$0 |
0% |
| Total |
$300,000 |
100.00% |
Income and Realised Capital Gains allocated to Member Pension and Accumulation Accounts
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 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. Unrealised capital gains (i.e. from assets that have appreciated in value but have not been sold) are never subject to tax until sold.
Example:
In our earlier example assume Barney's SMSF has derived interest income of $2,000 for the financial year and sold shares held for greater than 12 months generating a realised capital gain of $20,000. The SMSF also sold shares held for less than 12 months generating a realised capital gain of $10,000. The income and realised capital gains are in turn allocated to each Members Account on a proportional basis as follows:
| Member Accounts |
% |
Income |
Capital Gains > 12 Months |
Capital Gains < 12 Months |
| Barney - SABP Account |
63.33% |
$1,267 |
$12,667 |
$6,334 |
| Barney - Accumulation Account |
3.33% |
$67 |
$667 |
$333 |
| Lisa - TRIS Account |
33.33% |
$666 |
$6,666 |
$3,333 |
| Lisa - Accumulation Account |
0% |
$0 |
$0 |
$0 |
| Total |
100.00% |
$2,000 |
$20,000 |
$10,000 |
Tax Payable on Income and Realised Capital Gains allocated to a Member Accumulation Account and TRIS Account
ESUPERFUND will allocate the SMSF income and realised capital gains derived by the SMSF for a financial year to each Members Pension and Accumulation Account on a proportional basis. The tax rate that applies to the income and realised capital gains allocated to the Members "Accumulation Account" and "TRIS Account" will be taxed as detailed below
Income will be subject to tax at 15%
Realised Capital Gains will be subject to tax at 15% if the asset is held less than 12 months
Realised Capital Gains will be subject to tax at 10% if the asset is held more than 12 months
Example:
In the above example tax will be paid as detailed below.
The $67 in income allocated to Barney's "Accumulation Account" will be taxed at 15%.
The $666 in income allocated to Lisa's "TRIS Account" will be taxed at 15%.
The $667 in capital gains held for more than 12 months allocated to Barney's "Accumulation Account" will be taxed at 10%.
The $333 in capital gains held for less than 12 months allocated to Barney's "Accumulation Account" will be taxed at 15%.
The $6,666 in capital gains held for more than 12 months allocated to Lisa's "TRIS Account" will be taxed at 10%.
The $3,333 in capital gains held for less than 12 months allocated to Lisa's "TRIS Account" will be taxed at 15%.
Lisa has a nil balance in her Accumulation Account and no tax is therefore applicable.
Tax Payable on Income and Realised Capital Gains allocated to a Member’s Retirement Phase Pension Account (SABP or R-TRIS)
Conversely the tax rate that applies to the income and realised capital gains allocated to Member’s Retirement Phase Pension Account (SABP or R-TRIS) will be taxed is 0%. A 0% tax rate is a taxation concession afforded to SMSFs providing thousands of dollars in annual taxation savings to Members who commence a Retirement Phase Pension Account in their SMSF.
Example:
In the above example tax will be paid as detailed below.
The $1,267 in income allocated to Barney's "SABP Account" will be taxed at 0%.
The $12,667 in capital gains held for more than 12 months allocated to Barney's "SABP Account" will be taxed at 0%.
The $6,334 in capital gains held for less than 12 months allocated to Barney's "SABP Account" will be taxed at 0%.
The total income allocated to Barney's Pension Account of $20,268 is tax free resulting in a tax saving of $2,407!
Monitoring Accumulation and Pension Accounts
If you make significant Rollovers or Contributions to your SMSF after commencing a Pension they will sit outside the Pension in the Member's "Accumulation Account" as detailed above. This will mean that earnings on this part of your Super Benefit will continue to be subject to Tax. You should obtain your own independent financial advice about whether it is more appropriate to commence a second SABP with your "Accumulation Account" balance if you have remaining cap space in the Transfer Balance Account.
Timing of Realised Capital Gains is important
As detailed above the tax rate on realized capital gains relating to a Member’s Retirement Phase Pension Account (SABP or R-TRIS) Account is 0%. Any accumulated unrealized capital gains up to the time of commencing the Retirement Phase Pension Account will also never attract tax if sold after the Member commences a Retirement Phase Pension Account.
Example:
Assume you are the sole Member of an SMSF. The SMSF acquired a number of Blue Chip Shares in 2003 for $600,000 and they are now valued at $1,000,000. You have recently turned 60 and decide to commence a Simple Account Based Pension. Accordingly if you sell the Blue Chip Shares the day after commencing the SABP (when your entire Super Benefit is in the SABP Account) you will not pay tax on the increase in value of $400,000. Interestingly if you sold the same shares the day before commencing the SABP you would pay tax on the entire capital gain of $400,000 (i.e. $40,000 in tax). The timing of the sale in the example results in a tax saving of $40,000.
Timing of Income is important
As detailed above the tax rate on income relating to a Member’s Retirement Phase Pension Account is 0%. This means that income paid will be tax free if that income is received after the Member commences a Retirement Phase Pension. This is the case even if the income relates to an Investment made before the Retirement Phase Pension commences.
Example:
Assume you are the sole member of an SMSF and the SMSF has invested your total Super Benefit of $1,000,000 in a 1 Year Term Deposit at 6.00%. Ten months into the Term Deposit you decide to commence an SABP. The Interest is subsequently paid two months later at the maturity of the Term Deposit. In this case the Interest received of $60,000 would be completely tax free as it was paid after the SABP commenced! Interestingly if you commenced the SABP the day after the Term Deposit matured, meaning the $60,000 in interest was paid the day before commencing the SABP you would pay tax on the entire interest of $60,000 (i.e. $9,000 in tax). The timing of the SABP Commencement in the example results in a tax saving of $9,000!
Refund of Franking Credits
As detailed above because there is no tax payable on SMSF earnings (including dividends) when all Member Benefits are in the Retirement Phase Pension Account, your SMSF is entitled to receive any franking credits on Australian Share dividends in cash from the ATO. Franking Credits 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 Account, 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, when all Member Benefits are in the Retirement Phase Pension.
Unrealised Capital Gains
Unrealised capital gains (i.e. from assets that have appreciated in value but have not been sold) are never subject to tax until sold. You will however notice when you receive your annual compliance documentation from ESUPERFUND that unrealised capital gains on assets are recorded as income in the SMSF Income Statement. This is a legal reporting requirement as all assets of the SMSF must be revalued to market value at financial year end in order to accurately report each Members Super Benefit in the SMSF. Notwithstanding that the unrealised capital gains appear in your SMSF Income Statement they are excluded from the SMSF Tax Return and not subject to tax until the asset is sold and the capital gain realised.
Tax Deductible Expenses
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.
Tax on Concessional Contributions after commencing a Pension
Concessional Contributions continue to be subject to 15% contributions tax even after you commence a Pension (both SABP and TRIS). Only the SMSF income and realized capital gains are tax free in your SMSF after commencing a Retirement Phase Pension. Non Concessional Contributions continue to be tax free when made to your SMSF.
Tax Savings when you commence an SABP
To see the potential Tax Savings associated with commencing a Retirement Phase Pension, please view our Case Study here.