Taxation of self managed super funds

[nextdj]

I am a tad confused at the moment, having received different information from my accountant, the ATO and the ATO website.

How are superfund earnings taxed before transition to retirement, during transition to retirement, and after retirement age?

Finally, the ATO website talks about incomes from a fund having an untaxed portion and a taxed portion. What does the untaxed portion and taxed portion consists of?

Thank you

 

[pixel]

I am a tad confused at the moment, having received different information from my accountant, the ATO and the ATO website.

How are superfund earnings taxed before transition to retirement, during transition to retirement, and after retirement age?

Finally, the ATO website talks about incomes from a fund having an untaxed portion and a taxed portion. What does the untaxed portion and taxed portion consists of?

Thank you

Two Q's that I can answer from experience with my own SMSF:

1. Once you're in Pension Phase (i.e. past retirement age) profits are taxed at 0%.
2. If you made after-tax contributions, e.g. by way of salary sacrifice, that portion and its profits is considered taxed. It's also "non-preserved".

 

[cropcos]

I am a tad confused at the moment, having received different information from my accountant, the ATO and the ATO website.

How are superfund earnings taxed before transition to retirement, during transition to retirement, and after retirement age?

Finally, the ATO website talks about incomes from a fund having an untaxed portion and a taxed portion. What does the untaxed portion and taxed portion consists of?

Thank you

prior to retirement the fund is in what is called accumulation phase. in this phase all earnings of the fund are taxed at 15%

if the member decides to commence a transition to retirement pension when eligible to, the earnings on that member account are tax free however employer contributions into the fund will still be taxed (at 15%)

once member reaches pension age and commences a pension its essentially the same treatment as transition, earnings of the member are completely tax free in the fund, however you can't make contributions into a pension account. It is possible to have both pension and accumulation accounts running if the member is still employed in some capacity, but the earnings on the accumulation balance will be taxed at 15%.

in terms of your other question about taxed and untaxed portion - it refers to either taxed or untaxed within the fund. these two portions come under a larger category called the 'taxable component' of the fund. under the taxable component, 'taxed portion' is all employer contributions and earnings of the fund which have had tax paid on them. the 'untaxed portion' is a bit rarer but is commonly seen in the government employees superfunds (as the govt funds dont get taxed on earnings year to year I believe, they pay tax when taking out their benefits) and these untaxed amounts are taxed when the member takes an income stream.

the second category is 'tax free'. typically this consists of your personal contributions which have been made out of your own after tax dollars (i.e. tax already paid outside of the super system). these are tax free receipts into the fund and will always be tax free when you take it out. this category doesn't grow though while in accumulation mode (unless you add to it) , its a fixed dollar amount and any earnings attributable to these funds are taxed and go to the taxable component.

 

[Junior]

Further to the above, the significance of the 'taxable' and 'tax free' components of a superannuation benefit are as follows:

Transition to Retirement Pension

Once a TTR Pension has commenced, all benefits used to fund the pension will have 0% tax on earnings and no CGT within the SMSF.

For persons under 60 yo, part or all of the TTR pension income may be taxed in the hands of the recipient....for example, say your benefits comprise 50% taxable component and 50% tax free component, and you are drawing a TTR pension of $20,000 per annum from the Fund.

The $10k tax free component is not assesable income. The $10k taxable component is taxed at your marginal tax rate, less a 15% pension tax offset. So if your marginal rate is 30%, this pension income will only be taxed at 15% or $1,500 +medicare levy.

Once you reach age 60 all pension income is tax free regardless of components.


Estate Planning

In the event of your death, taxable and tax free components may become an issue again. If your super benefits pass to a non-dependant (i.e. adult child) then the 'taxable' component may incur a 16.5% estate tax. This can be a significant issue in some cases, and there are strategies that can be taken to avoid this potential outcome.


As always, the above should not be construed as financial advice. DYOR and/or speak to an authorised financial planner.

 

[cropcos]

spot on junior

 

[jnalad]

I am a tad confused at the moment, having received different information from my accountant, the ATO and the ATO website.

How are superfund earnings taxed before transition to retirement, during transition to retirement, and after retirement age?

Finally, the ATO website talks about incomes from a fund having an untaxed portion and a taxed portion. What does the untaxed portion and taxed portion consists of?

Thank you

1. Super Fund earnings are taxed at 15% including any employer contributions and salary sacrifice by the member (pre-tax money).
2. Transiton to Retirement is when a member has reached aged 55 and allowed certain amount of taxable money as tax free until the member has reached age 60. Once the member has reached age 60 all funds are tax free but the member has to be fully retired or start a part pension once the member has reached preservation age of 65.
3. Untaxed portion is where someone has put contribution into a Fund without paying the 15% contributions tax. This is very rare and I believe this was practised in the past to maximise benefits. So if you have untaxed portions in your fund, you have to pay the 15% contributions tax. This was means of delaying the contributions tax on exit rather then on entry which is the norm.