Ask Max: Superannuation Reforms Special Edition

My SMSF has two members, my wife and I. The proposed change indicated that income earned by the fund over $100,000 is taxed at 15% per person. We are both in pension mode. My contribution to the fund is 75% and my wife’s is 25%. If the fund’s income were $230,000, what would the tax payable be?

Answer: If you have 75% of the fund that would mean your share of the $230,000 income would be $172,500 and your wife’s share would be $57,500. If this new tax was introduced, your wife would not pay any extra tax but you would pay $10,875 on the excess of your income over the $100,000 limit.

I have a medium-size SMSF in allocated pension phase which does not earn $100,000 in dividends and interest income. However if I look at the growth of the fund, it does grow by this amount some years from the purchase and sale of shares during the year. Does Swan’s latest tax grab actually include ‘growth and earnings’ of a SMSF, or is it strictly earnings such as dividends and interest only?

Answer: The income credited to a member’s account each year is a mixture of income earned and their share of the increase in the value of investments. However, the income tax paid by each member is paid on an adjusted amount of income each year.

All super funds including SMSFs pay tax on assessable contributions, interest, dividends, rent, other income such as distributions, and net capital gains. The capital gains figure used is realised capital gains and not the increase in the value of investments that is often included as income for the fund and is distributed to members.

This means the proposed $100,000 limit will not include unrealised gains due to the value of investments increasing. As a result the 15% extra tax would not be paid on the unrealised increase in the value of investments.

Would you please clarify whether the $100,000 investment earnings in the case of a SMSF relates to each individual member in the fund or does it relate to the total SMSF earnings?

Answer: The proposed $100,000 limit relates to income earned per member and does not apply to the fund as a whole. This means in a fund with $500,000 of income, with four members each equally having 25%, the 15% tax would only be paid on $100,000 of income.

Do the capital gains provisions apply to net capital gains in the tax year, or to capital gains only? How are capital losses handled? Will capital losses be able to be carried forward to the next year? Most of us in pension mode suffered heavy capital losses during the global financial crisis and are struggling to recover those losses. Not taking capital losses into account in the proposed changes could be disastrous.

It seems that funds which are biased towards shares will be penalised since most of the fund growth comes from capital gains. Is this likely to force a reduction in share holdings? The government statement uses the word “earnings” in relation to the $100,000 tax free. How does that relate to the terms “income” and “capital gains”? When do the proposed changes take effect, or does that depend on whether the current government is re-elected?

Answer: The method of calculating capital gains for a super fund should only change in relation to the final step that is currently used when calculating assessable capital gains made. The first step in the process is to reduce capital gains made in the current year by capital losses also made in that year. The next step is to reduce any remaining capital gain by carried forward capital losses.

Currently, any remaining capital gain made by a superannuation fund is reduced by a one-third discount factor. This is the step that would no longer apply so that super funds would pay 15% tax, if they are in accumulation mode, on all of the net capital gain made. If in pension mode, the entire capital gain would count toward the $100,000 limit.

Whether or not trustees decide to decrease their exposure to shares in an SMSF will depend on a wide variety of issues. I do not believe that if this change to capital gains tax calculations was introduced that this would result in a large reduction in an SMSF’s exposure to this sector.

The income earned by a fund includes both normal income, such as interest and dividends, and also includes capital gains. In all likelihood, in my opinion, the legislation to give effect to these changes will not be introduced into parliament until after the election. This means the changes would not become law unless the Gillard Government is re-elected.

I note that from 1 July 2014 the income earned in excess of $100,000 by superannuation funds from investments that support the paying of a pension will be taxed at 15%. Does that rule apply to an SMSF if it has more than one member, or does it apply to any excess income beyond that of $100,000 per member?

Answer: There is no guarantee that this new tax will apply, so it is not definitely coming into existence from July 1, 2014. If this did become legislation the rule would apply on a per member basis on the amount of taxable income allocated to the member’s account each year.

We have a fund in pension phase (we are73 and 66 years old) holding commercial property. We couldn’t claim any deductions because the fund was tax free. Does the change mean we now need to do a full tax return and claim outgoings, maintenance and management costs etc?

Answer: I do not understand how your fund could be preparing accounts and not taking account of the costs related to the commercial property unless they are all met by the tenant. If somehow you, as members, are meeting the costs related to the property, rather than the super fund, this would be regarded as a contribution to the fund, which would not be allowed unless you meet the work test.

This means your fund should be currently accounting for all of the costs related to the commercial property it owns and these would be included in the accounts and income tax return for the fund.

I am 60 years old and have an SMSF with my wife who is 56. The fund is in pension mode. My account balance is just over $900,000 and produces a pension of $30,000pa. My account earns income of $54,000. The reason the income is so high is because it is invested primarily in bonds, hybrids and high yielding shares.

That alone is simple enough, however it gets complicated when you realise that I receive a Queensland government superannuation pension of $ 67,000pa. This pension is as a result of me retiring due to permanent disability in 1998 on 75% of my final salary. It is CPI indexed for life, and after I die my wife will receive two-thirds of the pension until she dies. I would like to know how the $100,000 affects me?

Answer: The $100,000 income level would apply to the income earned by your superannuation fund and not the pension income you earn. On that basis, as your account in the SMSF earns $54,000 a year, you would not be liable for the 15% tax until your account in the super fund earned over $100,000 a year.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au