Taxation Issues

Lodgement Services for Fund Tax Returns

Where SATO SMSF Administration® is appointed as your fund administrator, all SMSF tax returns will be prepared in accordance with Part IX of the Income Tax Assessment Act 1936 (ITAA 36). As tax payers, self managed super funds are also subject to general tax principles unless modified in PART IX. The majority of fund incomes are derived as dividends, interest, rent from investment property or capital gains. The following issues deserve a special mention.

Taxable Contributions to include in Fund Tax Returns

Certain contributions to self-managed funds are treated as taxable income under section 281 of ITAA 36. Taxable contributions (as defined in section 274 ITAA97) are contributions made for the purpose of making provision for superannuation benefits for another person (e.g. employer contributions), which does not include:

Eligible spouse contribution;
Contributions made in respect of a child under 18, not being an employer contribution; &
Un-deducted contribution made by the member. 

All third party contributions are deemed taxable when received by self managed super funds, irrespective of whether the third party or employer is entitled to an allowable deduction. Personal contributions (such as self employed contributions) are taxable to the extent they are covered by a section 82AAT notice. For example, contributions made by the member are taxable to the extent the member has claimed a tax deduction for the contribution under section 82AAT of ITAA 36. Other examples of taxable contributions to include in fund tax returns lodgement include:

Transfers from the Superannuation Holding Accounts Reserve (SHAR); &
Superannuation guarantee charge shortfall payments;
Certain rollover amounts are deemed to be taxable contributions, including:
The untaxed element of the post-June 1983 component of an ETP;
Golden handshakes;
Unfunded payments by an employer (e.g. retrenchments); &
Payments from constitutionally protected funds (e.g. certain government funds) – section 274 ITAA36. The deduction of tax from the post June 1983 (untaxed) component turns the amount into a post June 1983 (taxed) component. 

Fund Investment Income

The most common income derived by self-managed super funds (SMSFs) are interest, rent and dividends or capital gains. Section 278 ITAA 1936 levies tax on the total of taxable earnings and taxable contributions received, less any deductions allowed to the fund. Trustees are advised to engage in the service of a suitably qualified tax agent or accountant when preparing fund tax returns to determine tax liability (or refund) owing by the fund. Where resident funds have maintained their complying status without significant breaches, fund earnings is tax at a rate of 15%. Special income and non-complying funds are taxed at higher rates.

Treatment of Franking Credits

One of the reasons why self-managed super funds (SMSFs) have proven to be a popular choice for wealth creation, is the ability to use the full extent of the value of franking credits even though the fund tax rate is 15%. The franking credit of a fully franked dividend (30%) is sufficient to cover the tax on the dividend (15%) and can also be used to offset tax payable on all assessable income including contributions tax. Depending on the composition of fund portfolio and the amount of taxable contributions, it is possible for self managed super funds to reduce tax on contributions and income to nil (in some cases, even receive a tax refund!). 

Where self managed super funds (SMSFs) are in the pension mode and not paying tax on the underlying investment income supporting the pension, it is possible to use the fully franked credits to offset other tax liabilities of the fund. A primary example is where members of the same SMSF are in both the accumulation and pension phases. Franking credits derived by the pensioner’s assets are used to offset the tax liability on contributions tax and income tax of the non-pensioners. A refund of franking credits in this situation will only occur where excess credits remain after the total tax liability of the whole fund is covered. The tax liability is levied at the fund level not the member level.

Taxation of Reserves

In certain circumstances, it may be prudent for trustees to establish a reserve for the fund. Where this is the case, any assets set aside for the reserves do not form part of the exempt pool of assets, and as a result, do not derive exempt current pension income. Income earned and capital gains realized on these assets are taxable at fund rates.

Annual Administration Expenses

Annual fund administration expenses incurred by the fund are tax deductible under the general deduction provision section 8-1 ITAA 1997. Common examples include accounting and audit fees, ATO supervisory levy, actuarial fees and general administration expenses. Trustees and employers are advised to consider miscellaneous ruling MT 2001/1, in relation to direct payment of fund expenses by third parties, such as the contributing employer of the fund. The payment of these expenses on behalf of members of the fund is deemed to be contributions to the fund by the employer. Consistent with the normal deductibility rules in relation to contributions – such payment will not be deductible under the general business expenses section of the Act.

Please note: Any reference to terminology or rates are subject to change, due to the dynamic nature of Income Tax Assessment Act.

 

 

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