Will my employer be able to pay my Superannuation Guarantee amounts into my SMSF?
How is the fund taxed?
Can the fund pay a pension from the SMSF or do I have purchase one from a large fund or life office?
What are Undeducted Contributions?
Will I be eligible for Co-Contributions with a SMSF?
Are my contributions to my SMSF tax deductible?
Will I pay the 'Superannuation Surcharge' levy?
What are some common mistakes that occur in SMSF administration?
Is life insurance tax deductible in an SMSF?
1. Who pays the fees for running a SMSF?
The fund pays its own costs of administration. Remember that the SMSF is a separate entity to any other financial dealings, and the funds in the SMSF are in your care as a trustee. It is important that the fund trustees leave sufficient cash in the funds bank account so as to be able to pay the liabilities the fund incurs as and when they are incurred.
2. Will my employer be able to pay my Superannuation Guarantee amounts into my SMSF?
Yes, your SMSF is a complying regulated superannuation fund and as such it is treated the same as if it was a large superannuation fund.
3. How is the fund taxed?
In accumulation, the fund is taxed at 15% on contributions and all earnings.However, capital gains incurred on investments held for more than 12 months is entitled to a 1/3 discount or an effective tax on capital gains of 10%.
When the fund transitions into pension phase the fund pays 0% on that pensioner's entitlement, i.e. if all members are in pension phase the fund would pay 0% taxation on any earnings or capital gains.
4. Can the fund pay a pension from the SMSF or do I have purchase one from a large fund or life office?
Yes, the fund can pay allocated pensions or the new market linked complying pensions.
SMSF's can also pay life expectancy or lifetime pensions provided they commence prior to 30 June 2005. If the member wishes to take this form of pension after 30 June 2005, the member will have to transfer their benefits to a large fund provider or life office and purchase the pension from these providers.
5. What are Undeducted Contributions?
Generally speaking, these are contributions made to the fund, for which you DO NOT claim a tax deduction.
As such these contributions are accepted into the fund without being taxed,and at retirement are paid out on a dollar for dollar basis tax free. These amounts are also not assessed against the Reasonable Benefit Limits (RBL)thresholds.
6. Will I be eligible for Co-Contributions with a SMSF?
If you earn less than $40,000 a year, make personal superannuation contributions and are otherwise eligible, the Government will now give you a helping hand with the Super Co-contribution.
It means that if your total income for tax purposes is $27,500 or less a year, the Government will match your personal super contributions, up to $1,000 a year, on a dollar-for-dollar basis. For every dollar you put into your super,the Government will put in a dollar, too.
When your income is more than $27,500 but less than $40,000 a year, your Super Co-contribution will be adjusted based on your income and how much you personally contribute. For example, if your income is $32,000 a year and you make personal super contributions of $1,000 during that year, you will be entitled to a Super Co-contribution of $640.
For more information please refer to the ATO website at www.ato.gov.au/super
7. Are my contributions to my SMSF tax deductible?
All employer contributions that comprise the Superannuation Guarantee and salary sacrifice are tax deductible. Only funds put into your SMSF out of your after tax monies is not deductible, except for self employed persons.
Self employed people are entitled to claim the first $5,000 as deductible contributions, and then 75% of additional contributions up to the age based threshold. The residual 25% of these contributions is treated as undeducted contributions.
8. Will I pay the 'Superannuation Surcharge' levy?
Surchargeable contributions are contributions to which the surcharge rate is applied. Once the rate is determined (step1), it is then applied to the member's surchargeable contributions (step 2).
The amount of surchargeable contributions is calculated differently depending on whether the fund is an Accumulated Benefits Fund or a Defined Benefits Fund.
To determine the rate the member needs to assess their Adjusted Taxable Income (ATI):
This is calculated by adding:
Taxable income from your personal Income Tax Return; plus
Deductible contributions to super; plus
Reportable Fringe Benefits from your per personal income tax return.
If this amount exceeds $114,981 (2003/04) then the ATO will send an additional assessment for 15% on the deductible contributions made to the SMSF.
If this amount is less than $114,981 then use this formula of (ATI - $94,691)/ $1,355
This will give a shading in percentage between (0 ' 15%) that is multiplied by the deductible contributions made to your SMSF.
For an Accumulated Benefits Fund the surchargeable contribution for each member is the sum of the following amounts:
taxable contributions paid by an employer or a person other than the member to a complying superannuation fund or RSA,
Superannuation Guarantee shortfall component paid by the ATO to a complying superannuation fund, RSA or ADF,
amounts transferred from the Superannuation Holding Account Reserve by the ATO to a complying superannuation fund, RSA or ADF,
personal contributions paid to a complying superannuation fund or RSA where the member obtained a tax deduction under section 82AAT of the Income Tax Assessment Act 1936,
the post 20 August 1996 component of an employer ETP
allocated surplus amount*.
*An allocated surplus amount is an amount allocated on behalf of a member by the trustee of a Superannuation Fund (accumulated benefits only) in a particular financial year. These amounts may consist of:
undistributed investment earnings
unallocated employer contributions
foregone or forfeited benefits
Ref: SCR 1999/1 Superannuation Contribution Ruling for allocated surplus amounts for superannuation (accumulated benefits) scheme
For a Defined Benefits Fund the surchargeable contributions are calculated by multiplying the member's salary for superannuation purposes (as defined in the Fund's Trust Deed) by a notional surchargeable contributions factor calculated and certified by the Fund's Actuary.
Members notional Surchargeable contributions factor x Member's annual superannuation salary
Ref: Superannuation Contributions Tax (Assessment and Collection) Act 1997;Section 8 for the definition of surchargeable contributions
Let's look at an example of an accumulation member's surcharge liability.
In the 2000/2001 financial year, Rhonda's employer contributed taxable contributions of $15,000 to her super fund. Based on Rhonda's Adjusted Taxable Income, she is subject to a 12% surcharge rate. There have been no other contributions made by Rhonda or by someone else on Rhonda's behalf. The surcharge liability is as follows:
9. What are some common mistakes that occur in SMSF administration?
The ATO has indicated that it has detected the following common compliance errors by trustees of self managed superannuation funds (SMSF's):
SMSF's are required to pay and lodge the supervisory levy of $45 even if it is the fund's final tax return.
Incorrect label for in-house assets
a recent ATO in-house assets project based in Queensland revealed accountants are including amounts at the in-house asset label in the regulatory return incorrectly. Of the 420 fund's that were identified as having in-house assets over the permissible 5% threshold. 70% of fund's did not have in house assets.The remaining 30% related to assets not meeting the in-house assets definition,due to grandfathering/transitional provisions or the definition itself.
Exempt pension income
Another project conducted in relation to 'other deductions' revealed that funds claimed deductions to ensure the taxable income of fund was zero. The ATO advises that the correct label is Exempt current pension income. In addition,just because the fund has moved into pension phase, does not mean the fund is entitled to a blanket exemption from tax. Actuarial certificates are required,and accounts continue to require preparation, audit and tax returns lodged.
Non complying status for SMSF's
The ATO advises only it can make a fund non complying based on the relevant circumstances of the fund. Until the ATO assesses the fund to be non complying,it will continue to be a complying fund and assessed as such. The ATO states that accountants and auditors cannot make a fund non complying unless the fund was originally set up as non complying.
Acquisition from members
Section 66 of the SIS Act provides that a trustee of a complying superannuation fund must not intentionally acquire an asset from a member. A is permitted to acquire business real property and listed securities from members so long as the transaction was made at market value: s66(2) SIS Act. Subsection s66(2A) allows a fund to acquire assets which meet the definition of an in-house asset in s71 SIS ie a loan, investment in, or lease to a related party or related trust of the fund, AND the market value of the in-house asset does not exceed the permissible level of 5%.
This is where some confusion has occurred. That is, if the assets do not meet the definition of an in-house asset, it cannot be acquired. Accountants' have referred to this as the 5% rule. Anecdotal evidence from accountants appears to show an attitude of if it's under 5% of the fund's assets then it's okay! The ATO is of the opinion that this is not correct. The ATO views that if the asset does not meet the definition of an in-house asset, the trustee should not acquire the asset regardless of value, or total assets of the fund.
10. Is life insurance tax deductible in an SMSF?
Where the life insurance is provided through a superannuation fund,contributions made to fund insurance premiums are tax deductible for self employed persons and substantially self-employed persons and employers.
However where life insurance is held outside of the superannuation environment, the premiums are generally not tax deductible.
For insurance through a superannuation fund, the annual deductible contributions to the superannuation funds are subject to age limits. These limits are indexed annually to movements in Average Weekly Ordinary Time Earnings. For 2003/2004 the limits are:
Age Range Annual Limit
Less than 35 $13,233
35 and less than 50 $36,754
Over 50 $91,149
These limits apply to employers making deductible contributions. They also apply to self-employed persons and substantially self-employed persons.
Included in these overall limits are insurance premiums. This means that no additional deductible contributions can be made for the funding of insurance premiums. Insurance premiums can, however, be funded by undeducted contributions.
The insurance premium paid by the superannuation fund can be claimed by the fund as a deduction to reduce the 15% tax on contributions and earnings.
Ref: ITAA 1936, Section 279
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