SMSF Contribution Taxation
When contributions are made to an SMSF or when a party is claiming tax deduction for them, contribution tax applies. These are also known as ‘concessional contributions’.
The SMSF contribution is part of the assessable income of the super fund. This means that when a super fund earns $100 in income from dividends and interest, and has a ‘concessional contribution’ of $50, the assessable income of the fund is $150. It is subject to some tax deductions for expenses, let’s say $20, leaving only $130 in taxable income. The tax rate of 15% is applied to the $130 taxable income.
- Reducing tax with franking credits
Franked dividends carry a 30% imputation credit, and income tax rate or super is only at 15%, can reduce the overall tax rate of the fund. This includes, the original taxable contributions. An SMSF contribution where tax deductions has been claimed will become part of the assessable income of the fund. After deducting the deductible expenses for the fund, the remaining taxable income is taxed by 15%. If the fund has imputation credits from dividends, these can also be used to reduce the amount of tax to be paid. Tax payables might also be eliminated altogether. You might even end up getting refunds.
- SMSF Advantage
Large or commercial super funds take out the 15% contribution tax once the contribution is made, preventing you from reducing them with franking credits. Sometimes large funds justify this as necessary for the efficient administration of these funds.
Low Income Super Contributions (LISC)
This was introduced by the government for low-income earners who earn under $37,000 per annum. No tax contributions on concessional contributions will be paid starting 2012/13.
- Who are the people eligible for low-income super contributions?
- Concessional contributions were made for you for the year to a compliant super fund.
- Your taxable income is $37,000 or less
- You do not hold a temporary resident visa (citizens of New Zealand in Australia that do not have a temporary resident visa are eligible for payment)
- 10% or more of the total income you make comes from business and employment
- The payable amount needs to be $20 or more.
The adjusted taxable income includes employer contributions and the individual’s own deductible contributions. Salary sacrifice is not allowed to get to the $37,000 threshold.
- What is LISC? LISC is a payment of up to $500 each financial year as superannuation for individuals earning $37,000 or less. It is 15% of the concessional (before tax) contribution which you or your employer makes from July 1, 2012, to a maximum payment of $500 or a minimum of $20. It is computed as:
Concessional contributions x 15% = LISC
- How can you get LISC? ATO states that if an individual lodges his or her income tax return, they will be able to receive the LISC in their super account once the income tax return is processed and information is received from their super fund regarding their SMSF contribution. If there is no income tax return lodged, eligibility will be worked out from the contribution information from the super fund.
Since ATO pays the LISC directly into the superfund, make sure that the fund has your tax file number or TFN. On your account statement, the super fund will let you know if you have received the LISC. It can take up to 14 months from the financial year’s end to receive the payment.
If an individual reaches his or her preservation age (set at 55) and have retired or are more than 65 years, they can have their LISC paid directly to them.
If an individual dies part way through a financial year, the deceased estate may still claim his LISC due to any concessional contributions made before their death.
Government co-contribution can still be accessed even if you already benefit from LISC. If LISC applies to concessional contributions, co-contribution applies to non-concessional contributions. However, the government wants to halve the matching rate from 100% to 50%, (which will halve maximum entitlement) and lower the higher income threshold to $46,920. The lower income threshold, where a full matching rate is allowed, is at $31,920.
- Possible change
In late 2013, the new government stated that LISC will be abolished because it was a part of the tax mining package of the old government.
How to pay excess contribution tax?
If you have exceeded your SMSF contribution limits, and are subject to excess contribution tax, understand your options on how to pay, the period of time involved and the process.
If you have exceeded your concessional contribution limit, ATO will send you a notice of assessment which includes the amount that you have to pay. A ‘voluntary release authority’ will also be received. This authority will allow you to release the tax amount from your SMSF.
Tax Deductions for SMSF contributions
Contributing to a superannuation fund means locking your money for some period until you meet a condition of release, like retirement. Tax deductions are available for these contributions. They can be claimed either by the employers contributing on behalf of the employees and personal contribution of some individuals. These individuals should meet certain conditions.
When employers make super contributions for their employee, these contributions are tax-deductible to the employer. They are only deductible up to the concessional contribution limit of the employee.
If individuals make contributions to super, they can claim a personal tax deduction if:
- They are self-employed. This means that only 10% of their total income can come from an employer (this included assessable, exempt income and reported fringe benefits).
- Anyone, eligible to contribute to super and who does not receive any super support or that no one contributes to their super fund on their behalf. Anyone who has not received employer or spouse contributions, people who are not working, have low income and do not receive SGC contributions can claim tax deductions on the super contributions.
- Deduction Limits
Contributions claimed as a tax deduction will be part of the assessable income of the super fund, and be taxed at 15%. But if the fund has enough deductible expenses or imputation credits from Australian equities, the overall tax rate can be reduced.
- Important requirement procedure or SMSFs
Contributors should notify the trustee of the SMSF on how much will be claimed as a tax deduction on a contribution made relevant to the financial year. Then, the trustee must acknowledge in writing that the notice was received.
Do not invalidate a tax deduction by starting a pension before lodging the notice of intention to deduct.
When it comes to SMSF contribution it will be best to get the view of an approved SMSF auditor to make sure that you are paying the right tax. If you have more questions about SMSF contribution taxation, talk to us and we will help you.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.