End-of-year SMSF tax considerations
Page 1 of 1
Tax planning and strategies can be important as you approach the end of the financial year.
Here are just a few key tax considerations to be aware of to help you and your self-managed superannuation fund make the most of available tax deductions and concessions.
Tax exemption on pension earnings
In order to be eligible to claim exempt current pension income (ECPI) for the 2015-16 financial year you must have a pension interest in your SMSF.
You must also make the required minimum pension payment in form and effect prior to 30 June 2016.
If the pension is a transition-to-retirement (TTR) pension, then generally no more than 10 per cent of the balance at 1 July, or if later, the commencement date can be paid during the year.
If the minimum payment is not made, or the maximum payment is exceeded for a TTR pension, then your fund may lose its ability to claim ECPI in the annual return.
This can also result in the pension ceasing and having to be recommenced the following year, including a requirement to recalculate the tax-free and taxable components of the pension.
If you fall short of meeting your pension payments, consider whether the ATO Commissioner's General Powers of Administration concession can apply.
This is applicable where a shortfall in the minimum payment occurred due to an honest mistake or due to matters outside of your control, where there is only a small underpayment.
More information on what is a small underpayment can be found in the article, "Practical approach to small pension underpayments".
Ensure segregated assets appropriately documented
A segregation strategy can be used as part of a fund's investment strategy to restructure assets so that the earnings and capital values of an asset or pool of assets are not shared across all members but instead are allocated to specific members or accounts.
For funds employing segregation strategies during the financial year it is important to ensure that:
• Pension payments are paid from the segregated account if a pension is fully segregated,
• Expenses are appropriately apportioned between unsegregated and segregated accounts, or notional sub-accounts are maintained,
• Segregation is appropriately documented in the fund's investment strategy to avoid Part IVA tax avoidance issues,
• The value of any segregated assets do not exceed the value of the pension accounts.
If segregation is not appropriately administrated, for example payment has been taken from the wrong bank account or segregation decisions have been made in arrears, this may result in the segregation strategy being invalid.
This can have implications for the taxation of earnings, in particular, the capital gains on assets intended to be segregated to a pension.
Notice of intent to claim a deduction for personal contributions
If you have made contributions to the SMSF for which you intend to claim or vary a tax deduction, ensure you submit a valid notice of intent. This must be acknowledged by the fund trustee.
The ATO has expressed concern that members are incorrectly claiming deductions. Remember that you as the member must provide the trustee with the notice (or variation) by whichever of the following dates occurs first:
• The day you lodge your income tax return for the income year in which the contribution was made,
• The end of the income year following the income year in which the contribution was made.
The trustee is also required to acknowledge your valid notice (without delay), unless the value of the relevant superannuation interest on the day the notice is received is less than the tax that would be payable in respect of the contribution if they were to acknowledge the notice.
More information on the correct process for an SMSF where a member is claiming a deduction for personal contributions can be found on the ATO website--there is an SMSF technical article called "Notice of intent to claim a deduction".
You can enhance your retirement savings and reduce your tax liability by contributing to your spouse's superannuation fund.
These contributions are non-concessional contributions that you can make on behalf of your spouse.
By doing so, you can help build your spouse's superannuation and may be eligible for a tax offset of 18 per cent on contributions up to $3,000.
|Spouse contribution tax offset|
|Maximum tax offset||$540|
To be eligible:
• You must make a non-concessional contribution into your spouse's complying superannuation fund in the financial year and not claim a tax deduction for the contribution,
• Your spouse must be under age 65, or if they have reached age 65 but are under age 70, then meet the work test,
• Both you and your spouse must be Australian tax residents and not be living separately and apart on a permanent basis, and
• Your spouse must have assessable income, total reportable fringe benefits amounts and reportable employer superannuation contributions of less than $13,800.
Remember that spouse contributions count towards the spouse's non-concessional contributions cap.
Tax file numbers
Avoid an additional tax of 34 per cent (including the temporary budget repair levy) on mandated employer contributions by ensuring your tax file number (TFN) has been provided to the trustee and your fund has registered for PAYG withholding where members are under 60 years of age and are receiving a pension.
Additionally, where no TFN is provided your fund may not be able to accept any personal contributions.
This impacts strategies such as those to obtain the government co-contribution and the spouse contribution tax offset.
It may be worth considering the possibility of pre-paying or bringing forward tax-deductible expenses to help reduce your taxable income.
This can be particularly useful if you are close to or slightly above the $300,000 threshold (income for surcharge purposes plus low-tax contributions) for division 293 tax (an additional 15 per cent tax on "taxable contributions").
Deductible expenses include:
• Donations to charity,
• Premiums for income protection insurance held outside of the superannuation environment,
• Interest payments on investment loans,
• The cost of maintenance and repairs to investment properties,
• Motor vehicle.
In an SMSF expenses are generally deductible to the extent that they were incurred on assessable income.
Some expenses like life insurance and the supervisory levy are fully deductible. Others must be apportioned.
ATO ruling TR 93/17 provides guidance on what expenses can be claimed in an SMSF.
More from Morningstar
Melanie Dunn is an associate actuary and SMSF technical services manager with Accurium. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.
© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.