Don’t be short-changed with tax deductions when in pension phase

As a growing number of SMSF members move to pension phase, the focus of the regulator is certainly shifting to issues such as exempt current pension income (ECPI).  A lot of focus has been on the claiming of the tax exemption on fund income, but recently the release of ATO interpretative decision, ATO ID 2012/47 has highlighted that funds may be under claiming the level of tax deductions they may be entitled to each year.

ATO ID 2012/47 discusses the issue of whether a rollover is a contribution for the purposes of 295-95(1) of the ITAA 1997.  This interpretative decision outlines that for the purposes of claiming tax deductions, the fund’s assessable income is to include all contributions and rollovers (regardless of the taxable or non-taxable nature of these amounts).  As stated in TR 93/17: income tax deductions available to super funds, general administrative expenses relevant to the operation of the fund as a whole can generally be apportioned according to the formula:

General administrative expenses * (Assessable income / Total income)

To understand this further, let’s consider the following example:

Geoff (56) and Jenny (54) are members of the Green & Gold Super Fund.  During the 2011-12 financial year, the following activity occurred within the SMSF:

  • rollovers of $460,000
  • concessional contributions (CC) of $45,000
  • non-concessional contributions (NCC) of $170,000
  • fund investment income of $38,000
  • general expenses of $4,700

During the year, Geoff started a transition to retirement income stream.  At year’s end, the fund obtained an actuarial tax certificate that outlined a tax exemption percentage of 56%.

Based on the Commissioner’s views expressed in ATO ID 2012/47, the fund is entitled to a tax deduction on the fund’s expenses as follows:

$4,700 x ($713,000 – $21,280)/$713,000 = $4,560

It appears funds may not have been including the non-assessable contributions and transfers in claiming tax deductions where a level of tax exemption is to be applied.  This would result in the following lower level of tax deduction being claimed:

$4,700 x ($83,000 – $21,280)/$83,000 = $3,495

(NB. $21,280 is the tax exempt amount (56%) on fund investment income of $38,000)

As you can see from the above example, the inclusion of the non-concessional contributions and rollovers as assessable income provides a 30% increase in the level of tax deduction that can be claimed within the fund for the financial year.

Have you ensured that tax deductions have been claimed correctly within your SMSF?  You certainly don’t want to be short-changed when it comes to tax time!

Read ATO ID 2012/47,

Death and Taxes with Super Benefits

There has been a significant amount of focus on the benefits of reversionary pensions since the ATO released draft tax ruling, TR 2011/D3.  The ruling considers the issue of where a pension will cease in the event of death where there is no automatic reversion to a beneficiary.  This reversion will only occur where either:

  • the terms and conditions of the original pension specify a reversionary beneficiary; or
  • a valid binding death benefit nomination exists (with explicit instructions to pay the benefit as a pension)

The ability to continue to pay an income stream to a tax dependant beneficiary will allow for the fund assets to continue to receive concessional tax treatment, rather than have to pay invest those monies outside of superannuation.

Whilst any amount paid as a lump sum to a tax dependant beneficiary is tax-free, regardless of age, the taxation of the benefit as an income streams is somewhat different.  Any taxation of the income stream being paid from the fund to a reversionary beneficiary (or tax dependant) will be based upon both the primary member’s age at death and the age of the beneficiary.

The table below outlines the different levels of taxation where a death benefit is paid as an income stream to a tax dependant:

It is important to remember that income streams can only be paid to tax dependant beneficiaries.  Non-dependants can only receive lump sum amounts, with the taxable components being subject to tax at 15% (taxed element) or 30% (untaxed element).

In addition, where an income stream is paid to a tax dependant child, the pension must cease at age 25, unless they have some prescribed disability).  At this time, the pension must be converted to lump sum and is paid as a tax-free benefit.

NB. According to the ATO website, the final ruling on when a pension commences and ceases (TR 2011/D3) is expected for release on 24 April 2012.

(C) The SMSF Academy 2012
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