Friday, June 14, 2013

Tax Deductions in an SMSF: Quick Tips for Contributions and Earnings

One of the most popular reasons to open a Self-Managed Superannuation Fund, or SMSF, is the tax benefits it affords. SMSFs are tax-effective vehicles in part because certain contributions and earnings linked to these smaller super funds receive special before-tax, or "concessional," treatment. Yet, SMSF trustees are warily eyeing the ATO as it sweeps trustee roles for rule-breakers.

In this climate, it's very important to ensure all self-managed super funds comply with the latest regulations. It could mean the difference between a tax rate of 45% instead of 15%. Compliance also frees the SMSF to deduct certain expenses. Let's take a look at the current state of allowable deductions, from life insurance premiums to administrative fees, to discover how the bills can be legally reduced within the framework of a Self-Managed Super Fund.

Rules of Personal Contributions


One way to trigger deductions and maximise retirement savings is by making concessional personal contributions to an SMSF. For self-employed or partially retired workers, personal contributions to an SMSF are deductible on individual returns. Note the cap on how much a worker can contribute in a year. This cap indirectly limits the amount of available deduction.

However, it is possible to exceed the concessional cap—currently set at A$25,000—but doing so means stepping back and paying the government more for "excessive contributions." This would cancel out any deductibility gains and should be avoided.

Of course, it is not possible to claim personal contributions whose sum is greater than the taxable amount. If, for instance, John's income is A$50,000 and he makes A$8,000 in personal contributions to his super fund, how much of his contributions can actually be deducted? A$50,000; deductions do not translate into income 'credits.' In the best-case scenario, the deduction reduces the taxable amount to zero.

Funding Assessable Income


Beyond personal contributions, members can generally deduct those expenses that directly contribute to the fund's assessable income. Normally, a Self-Managed Superannuation Fund incurs some administrative and actuarial costs in the course of sustaining the trust on behalf of the members, and these—including the ATO's levy—are certainly deductible. Some insurance expenses, namely death and disability premiums, may qualify as well.

A lesser-known deduction is the cost of paying out on a life insurance policy if one or more members passes away. This is called the Future Services Benefit Deduction. In some situations, deducting this expense is a smart move that could end up saving the surviving members thousands. It could even prevent them from having to pay taxes on fund earnings for several years.

Earnings from Fund-Held Assets


Tax deductions are also available to offset certain fund expenditures and investments. The most popular deduction depends on the tax-free treatment of earnings from a super pension's assets. Any income or capital gains made on the investments of these assets can be counted against the SMSF's income.

The tax office says over 85% of SMSF deductions in 2010 were based on this rule. It is the main attraction for many retirees who now rely on self-management for maximising their investments. People who claim these deductions, however, must remember to continue making minimum pension payments every year. It's what qualifies super investment expenses and earnings for tax-deductibility.

This strategy could be profitably deployed by a retired couple, for instance, that wants to combine both taxable and tax-exempt funds into their pension. Read this tax saving through SMSF case study, where SMSF Perth put together a strategy to design a largely tax-free inheritance for their children, while taking advantage of concessional deductions for the taxed money they actually lived on.

Author Bio: Greg Major, Director, Blueprint Wealth:
Greg Major, Director of Blueprint Wealth which specialises in Self-Managed Super Funds in Perth, has over fifteen years’ experience in a variety of Financial Services roles within the Banking Sector in Australia. Most recently Executive Vice President with ABN AMRO, Greg has extensive experience across all major wholesale banking and finance fields, including derivatives and risk management, capital markets and structured finance, and balance sheet, liquidity and capital management with experience working across Europe and Asia.


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