24 Posts

Taxation of Superannuation Funds

Posted on March 22, 2019 by Piera-Lee Ramm

The following information provides an overview of the basics of taxation applicable to Self Managed Superannuation Funds (SMSF). Superannuation funds are essentially subject to the same taxation principles as any other taxpayer, however they receive concessions such as a reduced tax rate, in return for complying with the superannuation laws.

Taxable Income

A complying superfund is subject to a maximum concessional tax rate of 15% on its taxable income.  The tax rate is reduced further for pension accounts and capital gains is reduced to 10% for investments held over 12 months – further information is provided below.

The taxable income of a SMSF is based on total assessable income less any allowable deductions. The most common types of assessable income for complying SMSFs are concessional contributions (such as employer and personal concessional contributions), net realised capital gains and investment income such as bank or term deposit interest, dividends, distributions and rent from properties.

Any tax payable can be reduced by way of relevant rebates such as imputation credits – currently, complying SMSFs can take full advantage of any franking credits in respect of Australian dividends despite having a concessional tax rate.

An SMSF which is found to be non-complying will incur tax at the highest marginal tax rate (45% plus Medicare Levy).

Special rules apply for capital gains and special income.

Capital gains

A capital gain arising from the disposal of a superfund’s asset will form part of the fund’s taxable income and will be subject to tax at 15%. Where the fund has held the asset for more than 12 months, it will receive a CGT discount of one-third of the capital gain. This effectively reduces the capital gains tax to 10%.

For example, if the fund makes a $15,000 capital gain on the disposal of an asset and the discount method applies, only $10,000 would be included as taxable income reducing the tax from $2,250 to $1,500.

Different options apply to assets acquired prior to 21 September 1999.

Pension Phase

Upon retirement (or another condition of release), a SMSF member can commence a pension from their member entitlement in the SMSF – the entitlements supporting the pension are referred to as being in pension phase.

Broadly, a complying superfund is entitled to a nil tax exemption for the income attributable to the pension phase benefits of the fund.

This means that an SMSF with members solely in pension phase will be 100% tax free. If a fund has members in both pension and accumulation phase, the proportion of net income which is exempt from tax will generally need to be determined by an actuary.

Once a condition of release is met and a lump sum or pension payment is made to a member, the lump sum or income stream itself is generally tax free in the hands of the member if they are over the age of 60, however there may be some tax payable if they are less than 60.

Summary

The following table summarises the income tax rates which generally apply to complying SMSFs.

 

Accumulation Phase

 

Income Associated with Pension Phase

 

 

Capital Gains (for assets acquired on or after 21 September 1999)

 

 

Special Income and Non-Complying Funds

15%

0%

 

  • 15% if held for less than 12 months
  • 10% if held for longer than 12 months (CGT Discount applicable)

45%

Special income (non-arm’s-length income)

A complying SMSF must pay tax at the highest marginal tax rate on ‘special income’ which includes:

  • Dividends received directly or indirectly from a private company, unless the dividend is consistent with an arm’s length dealing
  • Distributions from a trust where the SMSF does not have a fixed entitlement to income from the trust (generally discretionary trusts)
  • Any other non-arm’s length income of the fund derived from a scheme where the parties are not dealing with each other at arm’s length and the amount of the income is greater than what it would have been had the parties been dealing at arm’s length in relation to the scheme

It is important to remember that an SMSF is a legal tax structure where the sole purpose is to provide for a member’s retirement. There are many issues to consider in addition to the taxation concessions enjoyed by superfunds.

Please contact our Superannuation Manager Helen Cooper on (08) 9316 7000 should you wish to discuss your specific circumstances in more detail.

Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001.

What Types of Insurance Can Be Held in Self Managed Superannuation Funds

Posted on November 27, 2018 by Piera-Lee Ramm

Self Managed Superannuation Fund (SMSF) Trustees’ are required to consider whether to hold insurance cover for members of the fund and to document their considerations in the fund’s investment strategy.

The Trustee will determine whether insurance is appropriate by assessing each member’s needs in terms of age, income, health and dependants.

Rules came into effect on 1 July 2014 which aimed to ensure that where members hold insurance policies within super, they are able to access the insurance proceeds from their fund in the event of a claim. Therefore, the terms and conditions of the insurance policy must align with one of the following conditions of release:

  • death (including a terminal medical condition),
  • permanent incapacity, or
  • temporary incapacity.

Trustees can consider multiple forms of Life Insurance, including Life Cover, Total and Permanent Disability insurance, and Income Protection.

Life Cover

Life insurance provides a lump sum to dependants in the event of death or diagnosis of a terminal illness. It can help increase the funds available to cover for loss of earnings and ongoing financial commitments.

The premiums are tax deductible to the SMSF, but not to an individual.

Please be aware that when proceeds from life insurance is paid from a super fund to non dependants, an untaxed element i.e 30% tax, is applicable in some circumstances where premiums are claimed as a tax deduction.  If no deduction is claimed there is no untaxed element. The closer the deceased is to retirement the smaller the untaxed element.

Should you require further information on the definition of a non dependant, please contact our office.

Life insurance is available on its own or commonly, along with Total and Permanent Disability (TPD) insurance.

Total and Permanent Disability (TPD) insurance

Permanent Disability Insurance provides a lump sum if the insured person suffers Total and Permanent Incapacity.

Permanent incapacity, under Super Legislation conditions of release, means ill health (whether physical or mental), where the trustee is reasonably satisfied that the member is unlikely, because of the ill heath, to engage in gainful employment for which the member is reasonably qualified by education, training or experience.

An insurer generally defines total and permanent disability as:

  • Any occupation – circumstances which leave a person unable to engage in gainful employment in any occupation for which the member is reasonably qualified by education, training or experience, or
  • Own occupation – circumstances which leave a person unable to work again in their own occupation they held just prior to TPD.

Under Super Legislation the definition of permanent incapacity is for ‘any occupation’.

From 1 July 2014, super funds are generally prohibited from taking out ‘own occupation’ TPD policies on behalf of their members as a benefit may become payable under the policy, despite the fact that the member may still be able to engage in some other employment for which they were qualified by education, training or experience, and therefore would not qualify to have the payment released from superannuation.

‘Any-occupation’ TPD policy premiums are generally fully deductible to the SMSF.

For ‘own-occupation’ TPD policy premiums, the proportion of premium used to fund ‘any occupation’ component is generally deductible to the SMSF with the remainder not deductible.

Total and Permanent Disability Insurance can be Linked with Life Insurance or it can be a Standalone Policy.

Income protection insurance

Income protection insurance generally pays an income stream for the purpose of continuing (in whole or part) the gain or reward which the member was receiving immediately before the temporary incapacity.

From 1 July 2014 only ‘standard’ Income Protection insurance policies are able to be purchased by SMSFs and these must comply with the conditions for temporary disability payments under Super Legislation.

While policies purchased by a SMSF will generally provide cover where a member is unable to work at all due to sickness or injury, they will not be able to offer some of the additional features and benefits which policies held outside of super can, such as redundancy benefits and nursing and housekeeper care.

Also, income protection policies offered within SMSFs requires the member to be gainfully employed (including self-employed) at the time of suffering the incapacity.

Income protection premiums are generally deductible to the SMSF provided that the benefits payable under the terms of the insurance policy comply with the requirements of Super Legislation.

There is no tax advantage to holding income protection in an SMSF, as premiums are tax deductible both inside and outside of super.  The benefit of a tax deduction is limited to 15% inside super, whereas it can be up to 45% outside of super.

Trauma insurance

Trauma insurance policies within the SMSFs are generally prohibited from 1 July 2014 as their terms and conditions do not align with one of the specified conditions of release under Super Legislation.

Prior to 1 July 2014

Prior to 1 July 2014, members of complying super funds were generally able to take out a range of life and disability insurance policies issued by a life insurance company within their fund.

The only requirement was that a trustee needed to ensure the acquisition of the policy would not cause the fund to breach the acquisition from related party rules and would be permitted under the sole purpose test and the fund’s governing rules.

Deciding whether to have insurance inside an SMSF will depend on a member’s individual circumstances and needs.

Please contact our Superannuation Manager Helen Cooper on 08 9316 7000 should you wish to discuss your specific circumstances in more detail.

Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001.

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