One of the basic principles of superannuation is that it is a low taxation vehicle. The Government gives these tax concessions in return for your SMSF complying with the super laws, which restrict when you can access these funds.

The following is a overview of the basics of the taxation within a SMSF, assuming that the fund is a complying superannuation fund.

Taxable income

The trustees of a complying SMSF are liable to pay tax (from the assets of the SMSF) on the taxable income of the fund for each year of income. The taxable income of a SMSF is calculated as:

Total assessable investment income + concessional contributions + taxable capital gains – allowable deductions.

This taxable income is taxed at the concessional rate of 15%.
However, the are some special rules for:

– capital gains
– special income

And a further reduction of tax payable by way of any rebates such as imputation credits.

Capital gains tax:

A capital gain arising from the disposal of an asset of the SMSF will form part of the fund’s taxable income and will be subject to tax at 15%. However there are some further concessions:

• – Where the fund has held the asset for more than 12 months, the fund will receive a discount of one-third of the capital gain (effectively reducing the capital gains tax to 10%). This is known as the CGT discount method. For example, if the fund makes a $10,000 capital gain on the disposal of an asset and the discount method applies, only $6,666.66 would be counted as taxable income.

• – Where the fund acquired the asset prior to 21 September 1999 and has held it longer than 12 months, the fund has the choice of using either the above discount method or the frozen indexation method (frozen at 30 September 1999) to calculate the capital gain. If the fund acquired the asset on or before 30 June 1988, the asset is deemed to have been acquired by the fund on 30 June 1988.

• Special income:

• Special income of a SMSF is taxed at the highest marginal tax rate i.e. 45%. It includes:

• – Dividends received directly or indirectly from a private company, unless the Commissioner is of the opinion that it would be unreasonable having regard to a number of factors.

• – Distributions from a trust, where the SMSF as beneficiary had no fixed entitlement (i.e. discretionary trust distributions)

• – Any other income of the fund where the parties were not dealing with each other at arm’s length, or the income derived is greater than that which could be expected if the parties had been dealing with each other at arm’s length (i.e. excessive unit trust distributions).

• Concessional (Taxable) contributions

• Concessional contributions (or formerly known as Taxable contributions) are those contributions generally made up of Employer contributions, and those personal contributions where the member has claimed a tax deduction. Contrary to popular belief, these contributions actually make up part of the fund’s taxable income.

• Use of imputation credits

• Once the 15% tax rate has been applied to the taxable income of the fund, the use of imputation credits may be able to reduce, or even eliminate the actual tax payable.

• Member goes into the pension phase:

• Upon retirement (or other condition of release), members of your SMSF will commence a private pension from the fund. From a tax perspective, any income and capital gains generated from what is known as “segregated pension assets” of the fund is subject to zero tax within the fund. That’s right, zero. In this case, any imputation credits received can be used to reduce the tax payable by other members of the fund who are in the accumulation phase. This allows incredible flexibility. If there are no “accumulation” members, then these imputation credits can be received by the SMSF as a refund from the ATO.

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

Plant and Associates Pty Ltd

Accountants Beenleigh, Accountants Nerang

www.plantandassociates.com.au

1300783394

For an SMSF to be a ‘complying fund’ and receive concessional tax treatment, the SMSF must be an Australian resident fund. SMSFs are at risk of losing their complying status, if their members spend time working overseas. This is because the residency rules require trustees and the majority of contributing members to reside in Australia.

For a fund to remain resident, the fund has to satisfy the residency rules throughout an income year — unless an exception applies.

The trustees’ presence rule

Generally speaking, for SMSFs, the individual trustees of the fund must be the same people as the fund’s members. Similarly, if a fund has a corporate trustee, then the directors of the trustee company must be the same people as the fund’s members.

Under the residency rules, central management and control of the SMSF must be in Australia: this implies that the trustee directors or individual trustees must function in Australia. Although these are commonly called residency rules, on closer examination they actually involve a physical presence test, rather than a residency test.

The exception to the trustees’ presence rule

However, there is one exception: a trustee or director may be absent from Australia for a continuous period of up to 2 years and still not jeopardise the fund’s complying status. To start the 2 year period again, the person must return to Australia for a visit of more than 28 days.

The risk to the SMSF by a breach of the trustees’ presence rule

The problem then, is that an overseas assignment of more than 2 years may well pose a residency problem for an SMSF — unless the assignment is broken by a return to Australia for a month or more.

The active members asset rule

Non-resident members must not have more than 50% of the total fund of active members

Member residency requirements revolve around the concept of an “active” member. Generally speaking, an active member is a member who is resident in Australia and currently contributing to the SMSF, or having contributions made by their employer to the SMSF.

Under another rule, the accumulated entitlements of non-resident active members must not exceed 50% of the entitlements of total active members — unless an exception applies.

The exception to the active members asset rule

However, there is also an exception to this rule. The amount of active member entitlements does not include those of a member:

• who does not contribute to the fund when they are non-resident; and
• who does not have contributions made by their employer to the fund in respect of periods of non-residency

This exception is available because the member is considered non-active.

Non-active, non-resident members still cause a problem…down the track

Even if that exception applies, a non-active, non-resident member will still present a problem to the SMSF if they are overseas for more than 2 years. This is because the SMSF will not be able to comply with the trustees’ presence rule.

Why is it important for a fund to maintain its residency status?

A fund needs to maintain its residency status. If a fund loses its residency status:

• it will no longer be “complying”;
• the tax rate on its income and gains increases from 15% to 45%;
• a tax of 45% of its assets applies in the year it becomes non-complying;
• a tax of 45% of the assets applies again if it then becomes complying again;
• it loses the discount for certain realised capital gains;
• it loses the exemption for income supporting current pensions;
• it loses exemption of income flowing from life policy investments and PST unit realisations; and
• it loses deductions for life and disability insurance premiums.

The ATO’s approach

The ATO has indicated at recent industry forums, that:

• it has no discretion to ignore a fund’s non-compliance arising from non-resident status; and
• it will be monitoring the residency status of SMSFs.

Funds can avoid residency problems

Planning an overseas assignment

It is crucial to seek advice on how a SMSF will be managed, before members go overseas. Although a member/trustee may plan to be away for less than 2 years, a change of plan to extend the trip may have disastrous results.

Contributions

If one or more remaining resident members have:

• more than 50% of the fund’s assets, then this will still satisfy the 50% resident active member requirement , and contributions may continue. However, it will be important to carefully monitor the situation in case those balances change or the intentions of the remaining resident members change; or
• less than 50% of the fund’s assets, then this will not satisfy the test. However, this problem may be avoided if during a period of non-residency, the contributions of the remaining resident members cease and no employer support is provided that is, the remaining members become non-active. However, the fund will still have to comply with the trustees’ presence rule

Trustees

It is important to seek advice about maintaining central management and control in Australia. It is not enough that the trustees may remain resident for tax purposes.

The legislation requires the trustees to be present in Australia, unless the 2 year concession applies. If a majority of the trustees/members remain in Australia or satisfy the 2 year rule, then it may be possible to put forward a case supporting Australian management and control. However, it is crucial to plan ahead and monitor to ensure that compliance is achieved.

What you should plan for

If there is any doubt about the central management and control of the fund, it would be prudent to plan for:

• Replacing the trustees:

This could be done by converting the SMSF to a small APRA fund with a professional trustee. This approach would generally enable the fund to continue its existing investments and strategy — as long as the new trustee agrees with the existing investment strategy. However, there are increased costs to engage a professional trustee and increased regulatory fees.

• Transferring entitlements to another fund:

Another approach is to consider winding up the fund and transferring the entitlements to a larger fund. However, the trustees would lose control over the specific assets: Also larger funds are most unlikely to accept the transfer of the member’s specific assets. This means that the SMSF’s assets may have to be converted to cash first (with duty and CGT consequences). However, one benefit is that administrative burdens and compliance concerns become a thing of the past.

These choices should be carefully considered in the context of members’ long term plans.

Plant and Associates Pty Ltd

www.plantandassociates.com.au

1300783394

admin@plantandassociates.com.au