Super may offer very attractive tax rates, but it’s still important to ensure your self-managed super fund (SMSF) is not paying more tax than it needs to. So tax planning for your fund is just as important as the tax planning you do for yourself and your business.
Not all SMSF income is treated the same, and timing is everything.
To kick-start your SMSF tax planning, here is a guide on how the timing of different types of income receipts can have a significant effect on the size of your super fund tax bill.
Interest income
Interest income is taxed only when it is physically received by your super fund. The fact that income is taxed on a cash basis means it is possible to plan when to elect to receive that income. Term deposit maturity dates can be planned in advance, as can interest on loans and mortgages.
Dividend Income
Dividend income is also taxed only when it has been received by the super fund.
Whether the dividend is paid to your fund in cash or you have a dividend reinvestment plan in place, it is the date the dividend is paid or reinvested that determines what year the dividend income is declared in the fund’s tax return.
So if a company declares a dividend on 28 June 2012 but only pays it on 5 July 2012, the dividend is not assessable until the 2013 financial year.
Rental Income
Rental receipts are assessed when the rent is received (cash basis).
If your tenant is in the practice of prepaying rent, say six or 12 months in advance, their prepayment may mean the income is taxed in your fund earlier than you expected.
It may be possible to review the terms of written lease arrangements to influence the timing of expected rental receipts. But remember, related party tenants need to be dealt with on arm’s-length terms.
Distributions income
Trust distributions on the other hand are assessable when declared, which can be weeks or even months before the distribution is actually paid or reinvested.
It is very common for super funds to have received distributions for only three quarters of the financial year before 30 June, with the fourth quarter not paid until, say, August of the following year. The August receipt is still assessable income in the previous financial year.
Distributions often include valuable tax components such as:
- tax free (never included in taxable income)
- tax deferred (not assessable now but may be taxable at some time in the future)
- capital gains (which may be subject to a one-third discount)
Contributions income
Contributions paid to your super fund are assessable when received (cash basis).
Determining when a contribution is ‘received’ is not always clear cut, especially if there is a lag between when the transaction is made and received; for example, dating contributions made by cheque, or contributions made by transferring assets to your super fund rather than cash. In most instances, a contribution will be received as soon as the Trustees have a legal right to the cash or assets contributed.
The timing of contributions income is extremely important – get it wrong and you could find yourself receiving a nasty excess contributions tax assessment. These are the tax rates you need to know:
[1]Contributions reserving strategy
A popular strategy, known as contribution reserving, allows for contributions received in June to be placed in a contribution reserve and allocated to a member in the following year. Interestingly, while the contribution for income tax purposes is assessable in the year it is paid into the fund, for contribution cap purposes, it counts in the year in which it is allocated. So it is possible for a contribution received in June to be assessed for contributions tax in 2012, but not be assessed for excess contributions tax until 2013.
It’s not always possible to avoid excess contributions tax if you are a high-income earner with multiple employers. Some taxpayers even choose to pay excess contributions tax to benefit from lower tax rates on investment income. But for the majority, excess contributions tax is something we would plan to avoid.
Tips on getting the timing right
• Income received from assets funding a current pension will be tax-free. If you are considering starting a pension on or after 1 July 2013, delaying income receipts until the 2013 financial year can save 15% tax on that income.
• If you have carried forward tax or capital losses in your SMSF, make sure you use those tax losses against contributions and investment income before starting a pension as the tax benefits may be lost once a pension starts.
• If you receive any income by cheque, it’s important to bank cheques promptly. Income received by cheque is considered paid, so delaying the banking won’t change the tax position of your super fund.
• Review your investment holdings and be sure you have claimed all income your super fund is entitled to. I often see super funds missing out on dividend or interest income because the Trustees haven’t provided payment instructions.
• The timing of contributions has never been more important now that excess contributions tax can apply if you exceed your caps. Before making large contributions, it’s important to seek professional advice to get the timing and amount right for your personal circumstances.
• Ensure you have notified all banks and share registries of your super fund’s Australian Business Number (ABN) or tax file number (TFN). If you don’t, you could be paying withholding tax on super fund income at 46.5%.
• Give your personal TFN to your super fund so your fund doesn’t tax your contributions any more than 15%.
• Make sure you don’t bank super fund income into a personal or business bank account.
• If you are approached to redirect super fund income to a charity, or to provide, say, rent-free use of a super fund property in support of a charity, be aware this is not allowed.
• If your super fund leases a commercial property to your business, ensure rent is physically paid to the super fund at market rates and preferably monthly in advance.
• It is common practice for all income of an SMSF to be accounted for in the super fund’s financials on an accruals basis. This ensures you have a very accurate measure of the actual return on your super fund’s investments, but doesn’t impact on the timing of reporting income for tax purposes.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.