ATO & Tax Information

The Australian Taxation Office (ATO) is a Self Managed Super Funds (SMSF) regulator.

In order to comply with all the relevant rules, you must be well informed of your taxation obligations.

This will minimise any risk of breach.

Please read on to find out what information is important for your situation.

The role of the ATO

The ATO is the official government regulator for SMSFs. They supervise SMSF compliance with superannuation and taxation law.

A SMSF is essentially a trust taxation structure – therefore the ATO is best placed to handle all aspects of SMSFs.

Taxation and SMSF’s before retirement

Before retirement, members are usually working and their fund receives contributions from their employer.

They accumulate funds until their retirement. They generally cannot withdraw any money from the fund until then.

Taxation of normal income

A SMSF pays 15% tax on its normal income. This includes:

  • Interest.
  • Dividends.
  • Managed fund distributions.
  • Capital gains (on assets held for less than one year).
  • Concessional (employer) contributions.
  • Deductible member contributions.

Taxation of long term capital gains

A fund can apply for a capital gains discount of 33% for capital gains on assets held for over one year, effectively reducing the tax on this income to 10%.

Taxation of special income

Non arms-length income is taxed at a rate of 46.5%.

The sole purpose of a fund is to provide retirement benefits, not save tax. Therefore the ATO encourages members to avoid using their fund for tax minimisation of their other income by taxing this income at the highest possible rate.

This includes most:

  • Private company dividends.
  • Private trust distributions.
  • Income from related party investments.
  • Related party income.
  • Income that is not at market value (excessive rent or loan interest).

Treatment of franking credits

Franking credits are special tax credits attached to dividend income. They represent the tax already paid by the company.

For example, a company makes a taxable profit of $500 and pays 30% tax of $150, leaving it with $350 of cash.

They can then pay their shareholders a $350 dividend with a $150 franking credit.

The fund is taxed on the dividend and the franking credit, but can claim the franking credit back.

For example, a fund receives a $350 franked dividend. The fund pays tax of $75, being15% of the total $500 dividend (made up of $350 cash plus $150 franking credit).

The fund then claims back the credit received of $150. Therefore the $75 tax, less the $150 franking credit now results in a tax refund of $75.

A SMSF gets a significant tax benefit from receiving dividend income with franking credits.

In this example, a $350 cash dividend ends up returning the fund $425 after tax.

For more information on how we can help your SMSF save tax, please enquire online today to get in touch with our expert financial advisers.

Treatment of foreign tax credits

Foreign tax credits are special tax credits attached to foreign income.

They represent the withholding tax paid by the overseas company when the dividend is paid to you.

For example, an overseas company declares a dividend of $500 and pays 30% dividend withholding tax to their government which amounts to $150. The investor is sent a cheque for $350. They have now received a $350 foreign dividend with a $150 foreign credit.

How is the fund taxed?

A fund is taxed on the foreign dividend and the foreign credit, but can claim the foreign credit against any tax payable. For example, a fund receives a $350 foreign dividend.

The fund pays tax of $75, being 15% of the total $500 dividend (made up of $350 cash plus $150 foreign credit).

The fund then claims the credit received up to the amount of the tax. Therefore the $75 tax bill, less the $75 maximum claim results in a no tax payable.

Do all SMSFs pay tax on foreign dividend income?

A SMSF may not be required to pay tax on foreign dividend income with foreign credits.

In this example, the $350 cash dividend ends up returning $350 to the fund, after tax.

Taxation of SMSF’s after retirement

At this stage a fund is paying eligible pensions to its members.

The members are in retirement and are drawing down funds every year. The income and assets of the fund are supporting the pension payments. The pension accounts cannot be increased by additional contributions.

Taxation of Investment Income

This pension fund pays 0% tax on the investment income supporting the pensions.

Taxation of special income

Special income is earned through transactions that are not at arm’s length. This income is taxed at a rate of 46.5%.

This type of income could includes dividends that are received from a private company and discretionary distributions to beneficiaries of the SMSF trust, where they had no fixed entitlement.

The regulator imposes this amount of tax to deter members from making personal gains. Remember, the sole purpose of the fund is to benefit members, not save tax!

As such, it is recommended that personal dividends and related party income are limited.

Taxation of franking credits

A pension fund does not pay tax on dividends and franking credits, but can claim these credits back. For example, if a fund received a $350 franked dividend it would pay $0 tax.

The fund then claims back the credit received of $150. Therefore the $150 franking credit results in a tax refund of $150.

A SMSF in pension mode gets a significant tax benefit from receiving dividend income with franking credits. In this example, a $350 cash dividend ends up returning the fund $500 after tax.

Taxation of foreign tax credits

A SMSF pension fund does not pay tax on foreign dividends and foreign credits.

For example, if a fund receives a $350 foreign dividend after withholding tax of $150, the fund does not pay tax, cannot claim back any credits and therefore has no tax payable or refundable.

In this example, this $350 cash dividend ends up returning $350 to the fund after tax.

Taxing a SMSF with different classes of members

An SMSF is taxed differently if it has one pension member and one accumulation member. In this case, the fund is required to order an actuarial certificate.

This is a calculation of the average member balances and tells the fund trustee how much of the fund is taxable and how much is tax free.

This commonly occurs where a fund is member is in ‘transition to retirement’ mode. They are receiving a pension on one hand and contributing to the fund on the other.

Taxation consequences

The fund is not tax free for that year if a member has not withdrawn the minimum pension from a pension fund.

A SMSF can only be granted tax free status if a valid pension has been paid, otherwise the assets are not technically supporting a pension.

Therefore, trustees must pay at least the minimum pension to members to ensure that the fund is assessed as tax free.

For more information about your fund’s taxation obligations please enquire online.

Our specialist SMSF tax team can provide you with the advice you need to make sure your fund complies with regulation.

Is a fund still tax free when a pension member dies?

As soon as the member dies the fund loses its tax free status as the fund’s assets cease to be supporting a pension. When the assets of the fund are subsequently sold to pay out a death benefit, the fund could be liable to pay Capital Gains Tax.

This can have huge and unintended consequences for funds with significant unrealised gains.

A fund that holds shares may not have that many unrealised gains as shares have been bought and sold over time.

However, a fund with significant property investments may have years worth of unrealised capital gains. If a fund has members who are getting old or are of ill health it is best to start planning how to effectively realise the fund’s CGT assets before death.

Other taxation rules

The information above is a simplified and illustrative summary of how SMSFs are taxed.

As a SMSF trustee, you must ensure that the fund does not underpay tax or make any mistakes in its income tax return. Speaking to an expert will ensure that you get your tax right, the first time round!

Call us today!

It is important to get assistance in the preparation of your SMSFs tax return.

A tax agent with specialisation in self-managed super knows all the taxation rules and can provide you with the most detailed advice.

Please enquire online and one of our SMSF tax experts will contact you to discuss your situation.

Note: this website is for informational purposes only and should not be substituted for professional financial or taxation advice.