Tax with Max: Income and the super tax

Income and the super tax, comparing super funds, and more.

Summary: This article provides answers on applying the super tax to income and non-realised gains, comparing super funds, renting out a pre-capital gains tax home, the rules on account-based pensions when a member dies, tax credits on foreign income, and the new contribution limits for over 60s.
Key take-out: The proposed Gillard super tax would not apply to unrealised capital gains, however because of its retrospective nature, and its administrative complexity, it is unlikely to be introduced by the current government.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Applying the super tax to income and non-realised gains

I wish to seek clarification on whether ‘income’ includes non-realised capital gains in the previous Gillard government’s proposed new super tax.

I present the following case scenario for your valued reply:

  • My SMSF, in full pension mode, is valued at $2,000,000 as at 30 June 2013.
  • It earns $100,000 via dividends/distributions/interest in the 2013-2014 tax year.
  • It grows by 6% to $2,120,000 in the same 2013-2014 tax year.
  • I don’t sell any shares (and therefore don’t realise any potential capital gains made in that year).
  • What is the tax situation (assuming that the Gillard government’s proposal gets up in its previously proposed format)?
  • Am I considered to have “earned” a total of $220,000 and therefore have to pay tax of $18,000 (being 15% of $120,000, the amount in excess of the $100,000 earned as actual dividends/distributions/interest)?
  • Or do I pay no tax? That is my “income” was $100,000 made up of dividends, distributions, interest only with no addition of my SMSFs capital growth to the equation.

Answer: The fine detail of how this new tax would work was never released. If this tax was to be levied on taxable income, which I believe was its intention, in the example that you have put forward the 15% tax would not be payable. When a super fund lodges its income tax return the income earned by the fund, including unrealised capital gains, is adjusted to arrive at the taxable income.

It is clear from what Tony Abbott and his minister for superannuation have stated that there will be no adverse changes to superannuation introduced in their first term of government. Given the inequity of the proposed 15% tax on superannuation income exceeding $100,000 because of its retrospective nature, and the administrative difficulties that would exist when members have different pension accounts with different super funds, I do not believe that this new tax will be introduced.

How to compare super funds

I am with West State Super and was wondering how you rate this super fund? I do not pay the 15% tax until I am in pension mode. Why do some pay 15% before and some pay 15% after pension. Which one in your opinion has the best advantages for me? I was thinking of doing my own super SMSF. Would it be cheaper to do my own or stay with West State Super?

Answer: I do not know West State Super and as such could not advise on whether it is a good super fund or not. If you want to check out how it compares to some of the better industry funds you should visit one of their websites as they often have a superannuation comparison tool. Using this tool will enable you to compare their super fund with up to two other funds that would include West State.

Your understanding of how the taxation is applied to your superannuation does not appear to be correct. When a member’s superannuation account is in accumulation phase 15% tax is paid on the taxable income it earns, including taxable super contributions. When a member’s account is in pension phase no income tax is paid on income it earns. This taxation principle applies to all superannuation funds.

The annual cost of having an SMSF depends on who you use for its administration. In some cases this cost can be as low as under $1,000. Where you are using an accounting firm that also provides advice in this area the costs can be a lot higher depending on the work involved.

The main reason for going into an SMSF should never really be cost saving. It is generally accepted that you need to have at least about $400,000 in accumulation phase for an SMSF to be cost competitive with the other choices. You may get some benefit from visiting my website, the SMSF survival centre, where the differences between the various super funds are outlined in greater detail.

Renting out a pre-capital gains tax home

Our marital home was built before capital gains tax and therefore would not be liable for CGT if we moved and sold it. However if we move to a smaller home and rent this house does it still retain its non-capital gains tax status if we sell it several years later?

Answer: As your home is a pre-capital gains tax asset you will never pay tax on any gain you make when it is sold. As to whether you will be better off retaining the house after moving to a new smaller home and then renting it will depend on whether you have to borrow to buy the new home. If you do not need to borrow for the new home this could be a worthwhile strategy.

If, however, you would have to borrow to buy the new home you would more than likely be better off selling the current tax-free property, using the funds produced to buy your new home, and then with any cash remaining use borrowed funds to buy the investment property. There are other possible strategies that you could use and you should seek professional advice so that you can assess all of your alternatives.

Tax credits on foreign income

I recently bought some Chorus (New Zealand NBN developer) shares, which are listed on the ASX and received a nice dividend this month. The dividend was increased by a “supplementary dividend”, 100% of which went to pay the New Zealand withholding tax. The shares are held in an SMSF, which is in pension mode. Is the tax paid in New Zealand recoverable when the SMSF lodges its Australian tax return next year?

Answer: When a taxpayer earns foreign income and tax has been deducted from the income earned a credit is allowed on the tax return that decreases any income tax payable in Australia. This principle applies to individuals and SMSFs.

Rules on account-based pensions when a member dies

Our SMSF has it minuted that our minimum account-based pensions are to be paid to us only once annually in June. I have heard that under these arrangements, if one dies before the June payment then the fund is in breach of the rules because the minimum pension has not been paid in that year. This seems irrational. Could you please advise if there are any special rules pertaining to the timing of payment of minimum pensions to prevent the fund becoming non-compliant in the event of the death of a member?

Answer: I was once guilty of thinking that where a member dies and they have not received an annual pension payment their superannuation account will not be regarded as being in pension phase. I have been advised by the ATO that in the event of the death of a member they do not apply the minimum pension payment rule. Therefore, in the circumstances that you outline, the member’s account would still be regarded as being in pension phase.

New contribution limits for over 60s

I have been told that contributions for over 65s are still only $25,000 and this has not increased to $35,000 as the law was not passed. Is this correct?

Answer: The legislation increasing the concessional contribution limits for people 60 and over was passed on or about June 28 this year. This means, for the 2014 financial year, people who were 59 at 30 June 2013 can contribute up to $35,000 in concessional super contributions.

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

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.

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