By Monica Rule

Some people are not aware that there may be tax payable when they transfer money from a retail superannuation fund into their SMSF.  They may face problems with the Tax Office if tax is not paid on the money received by their SMSF.

You see, superannuation funds in Australia are either “taxed” funds or “untaxed” funds.  Most Government funds are untaxed funds and most retail and industry funds are taxed funds.  The difference between the two is the timing of when tax is paid on the contributions and investment earnings received by the fund, and benefits paid by the fund.

Some superannuation funds also have “taxed” schemes and “untaxed” schemes for their members.  For example, in Western Australia, the Government Employee Superannuation Board (GESB) has a taxed scheme: “GESB Super” and untaxed schemes: “West State Super” and “Gold State Super”.

Concessional contributions – such as employer contributions, salary sacrificed contributions and personal contributions where a tax deduction is claimed on the contributions, when received by an SMSF, will attract 15% tax.  An SMSF also pays a maximum of 15% tax on its investment earnings.  This money is recorded as a “taxable” component in an SMSF’s financial records.  Then, when a superannuation benefit is paid from an SMSF, this money will be shown as a “taxable” component and may attract tax for recipients aged under 60 depending on the amount of money.

On the other hand, an untaxed superannuation fund does not pay any tax on these contributions or investment earnings received by the fund. As there was no tax paid, the money is recorded as an “untaxed” component in the fund’s financial records.  Then, when a superannuation benefit is paid from the untaxed superannuation fund, this money is shown as an “untaxed” component and will attract tax for the recipients regardless of their age.

Now, when money is rolled over or transferred from an untaxed superannuation fund into an SMSF, the rolled-over money will contain an “untaxed” component.  The untaxed fund will pay tax at a flat rate of 47% (i.e. the top marginal tax rate plus Medicare levy) on the untaxed component that exceeds $1,445,000 (i.e. untaxed plan cap for the 2017/2018 financial year). The untaxed component, which has attracted the 47% tax, will be included as a tax-free component when it is rolled into the SMSF.  The SMSF will pay tax at 15% on the untaxed component for amounts up to $1,445,000.

Example

On 20 September 2017, John asks his untaxed superannuation fund to roll over his superannuation money totalling $1,600,000 into his SMSF.  The money consists entirely of an untaxed component.  The untaxed plan cap for the 2017/2018 financial year is $1,445,000. This means, John’s rollover amount exceeds the cap by $155,000 (i.e. $1,600,000 – $1,445,000 cap = $155,000).  The untaxed fund will withhold tax of $72,850 (i.e. $155,000 x 47% = $72,850) on the amount in excess of $1,445,000.

The amount reported by the untaxed super fund to the SMSF on the rollover benefits statement will show a tax-free component of $82,150 (i.e. $155,000 – $72,850 tax payable = $82,150) and an untaxed component of $1,445,000 (i.e. $1,600,000 – $155,000 (excess amount) = $1,445,000).

John’s SMSF will report the $1,445,000 as income in the SMSF’s annual tax return and pay 15% tax on the rolled over money. 

It’s important to understand what sort of fund you are rolling money out of and into your SMSF. It can come as quite a shock when the Tax Office takes a large chunk of your super if you aren’t prepared for it.

Proportioning rules

When a superannuation fund member accesses their superannuation savings, they are usually not aware of how the money is paid from their superannuation fund.   Of course if the superannuation fund is an SMSF and the member is aged 60 or over, it really does not matter as there is no tax payable on the superannuation benefit received by the member.

However, if the SMSF member is under the age of 60, then tax may be payable depending on the amount paid out and the components of their superannuation benefit.

When most SMSF members receive their superannuation benefit it will consist of a tax free component and a taxable component.  The tax free component represents the personal contributions made into their SMSF where they did not claim tax deductions on the contributions. The taxable component is made up of contributions such as employer contributions, salary sacrificed contributions, personal contributions where tax deductions have been claimed and investment earnings received by the SMSF.  The SMSF would have paid a maximum tax of 15 per cent on this money and when the money is paid out to the member, as a superannuation benefit, it is represented as a taxable component.

Now, if an SMSF member’s superannuation savings does consist of tax free and taxable components, unfortunately they cannot just choose to access their tax free component.  Under the taxation law, all money withdrawn from a superannuation fund must be paid in the same tax free and taxable proportions as they exist in the fund.  This means, if an SMSF member’s accumulation account has 20 per cent tax free money and 80 per cent taxable money, then their lump sum superannuation benefit must be paid out in the same percentages.  For example, if a member withdraws a lump sum superannuation benefit of $300,000, then $60,000 would be the tax free component and $240,000 would be the taxable component.  Of course it should go without saying that the member should only access their superannuation savings if they have met a condition of release under the superannuation law!

There is no tax payable on the tax free component regardless of the age of the member receiving the lump sum benefit.  However, if the member has not reached their preservation age when accessing the money, then tax is payable at a maximum of 20 per cent plus the Medicare Levy on the taxable component.  If the member has reached their preservation age but is under the age of 60, then the first $200,000 (i.e. the low rate cap for 2017/18) is tax free and the balance of the money is taxed at a maximum of 15 per cent plus the Medicare Levy.

Of course if the SMSF member is aged 60 or over, then no tax is payable on both the tax free and taxable components.

The same rule applies to members commencing an account based pension from their SMSF.  The tax free and taxable components are determined at the commencement of their pension.  The percentages remain the same throughout the duration of the pension.  Each time a pension benefit is paid from their SMSF, it is paid in the same percentages.

Understanding the treatment of superannuation money will assist you with decisions when accessing your superannuation savings.

For Gold and Platinum members, please read on for examples of the tax treatment of superannuation money

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.

Related documents:

• Self Managed Superannuation Fund Deed
• SMSF - Update Rules
• Investment Strategy for Self Managed Super 17/18
• SMSF Limited Recourse Borrowing Arrangement

Related webinars:

• Webinar Recording - Time to Address the SMSF Sleeper - Estate Planning within the fund
• Webinar Recording - Understanding the 2017 Superannuation Changes
• Webinar Recording - When a Will is not Simple