SMSF Strategy Guide: Online Library

Contributions tax

SMSF Education
Smsf strategy guide: Online library

Tax on Concessional Contributions

BACKGROUND

Contributions tax is the tax that applies to concessional contributions. Concessional contributions are those contributions made to a SMSF whereby someone is claiming a tax deduction for the contribution.

EMPLOYERS & MEMBERS

The most common examples of these are:

  • An employer making Super guarantee contributions (SGC) on behalf of an employee. The employer in this instance is claiming a tax deduction for the contribution as it is an expense to their business, just like employee wages.
  • A member making their own contributions to their self managed super fund, where they will claim a tax deduction for the contribution. The most common example of this is contributions from those who are self employed (although they don’t have to be self employed).

So in essence, the deal the Government are doing with you is this:
If you or your employer are claiming a tax deduction for your contributions, then 15% contributions tax will apply. Given that the marginal tax rate of most workers is higher than 15%, you are getting a significant tax break for the fact that you can’t access this money until retirement. That’s the deal.

THE SMSF ADVANTAGE

When concessional contributions are made into a large commercial or industry fund, the administrative reality that those funds face means that the 15% tax on those contributions is generally taken out when the contribution is made.

With SMSFs, it’s a bit different. In fact, one could argue that contributions tax does not really even actually exist, at least not in the way most people think of it. Here’s what we mean.

When concessional contributions are made to a SMSF, there is no ‘contributions tax’ that applies to them then and there. Rather, those contributions actually form part of the assessable income of the fund, which in turn is taxed at 15% at the end of the financial year and the accounts and ATO returns are complete.

So here’s the thing. The assessable income of the fund is also reduced by any deductions that the fund may have, and any tax payable can be reduced by any franking credits the fund may be in receipt of via it’s investment in Australian shares and hybrids.

Consider a situation where all the income of a SMSF was fully franked income. If the company tax rate that was applied to those dividends was 30%, but the income tax rate of the SMSF is 15%, then not only will the franking credits attached to those dividends eliminate the tax payable on the income, there will be franking credits left over to also help reduce any tax payable on those concessional contributions.

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