Taxation of superannuation funds

What SMSF trustees should know on taxation.

One thing that super funds and individuals have in common is the way they pay tax. The process for super funds is as follows:

  • Calculate what the total assessable income is for the year.
  • Calculate the total allowable deductions.
  • Subtract the allowable deductions from the assessable income, arriving at the total taxable income for the fund.
  • Calculate the tax payable at 15 per cent.
  • Deduct from the tax payable total credits for such things as imputation credits and foreign tax credits.
  • The resulting amount will either be the tax payable for the year or the refund due.

Where a super fund differs from an individual is that there are times when it may not have to pay any tax even though it is earning assessable income. Individuals pay tax on their assessable income throughout their life. Super funds can go through two distinct taxation phases, and at times can be in both phases at the one time.

The first phase is when the super fund is building up funds to pay retirement benefits and is accumulating contributions and income. The second phase is when one or more members in the fund are being paid a pension. Not surprisingly, these two stages are called the ‘accumulation phase' and the ‘pension phase'.

While a super fund is in accumulation phase it pays tax at 15 per cent on its income. Until new legislation was passed on June 28, 2013 the tax rate payable on taxable contributions was 15 per cent. There are now two situations when this is not the case.

In the first case people who earn more than $300,000, including amounts salary sacrificed as extra super contributions, will pay an extra 15 per cent on the amount that the super contribution exceeds the $300,000 limit.

In the second case people with taxable income of less than $37,000 will have the 15 per cent contributions tax reduced by a 15 per cent rebate to a maximum of $500.

When a fund is in pension phase no tax is payable on income earned that is used to fund the pension.

Things get complicated when a super fund has members in both accumulation phase and pension phase. In this case concessional contributions and income related to the accumulation phase investments are taxed, while the income earned on the pension-phase investments is not taxed. Where a member is retired but takes lump-sum payments the fund is still regarded as being in accumulation phase and pays tax on its income.

Another difference between individuals and super funds is the capital gains discount applied to investment assets owned for longer than 12 months. An individual can discount a capital gain by half, while an SMSF can only discount the gain by a third. This means super funds effectively have two tax rates, 15 per cent on normal income and concessional contributions and 10 per cent on eligible capital gains.

Taxable income of a super fund

The tax treatment of income earned by a super fund, and what is included as assessable income, is very similar to what an individual must pay tax on. In addition to the general types of income that are taxable for individuals, super contributions that have been claimed as a tax deduction are also included as income for a super fund.

Types of taxable income received by a super fund include the following:

  • employer SGC contributions
  • employer concessional contributions
  • employee salary sacrifice contributions paid by an employer
  • self-employed concessional contributions
  • any other concessional contributions
  • investment income
  • assessable capital gains.

Investment income includes:

  • rent
  • interest
  • dividends
  • distributions from partnerships, trusts and joint ventures
  • foreign income

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