SUPERANNUATION:  Be tax-aware when rolling over to a SMSF fund.
SUPERANNUATION: Be tax-aware when rolling over to a SMSF fund. ThinkStock

Self managed super bill shock ahead

SOME people are not aware there may be tax payable when they transfer money from a retail or industry superannuation fund into their self-managed super fund.

They may face problems with the Australian Taxation Office if tax is not paid on the money received by the SMSF.

The way it works is that superannuation funds in Australia are either taxed funds or untaxed funds. Most government funds are untaxed and most retail and industry funds are taxed.

The difference between the two is the timing of when tax is paid on contributions and investment earnings received by the fund and benefits paid by the fund.

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

As you may gather, this is a difficult area and I will use an example later to try to show it in action.

The key issue to understand is that concessional (pre-tax) contributions - such as employer contributions, salary sacrificed contributions and personal contributions - where tax deduction is claimed on the contributions, when received by an SMSF, will attract 15 per cent tax.

An SMSF also pays a maximum of 15 per cent tax on 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 the money.

On the other hand, an untaxed super 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 super fund, this money is shown as an untaxed component and will attract tax for recipients of any age.

Now, when money is rolled over or transferred from an untaxed super fund into an SMSF, the rolled-over money will contain an untaxed component. The untaxed fund will pay tax at a flat rate of 49 per cent (the top marginal tax rate plus Medicare levy) on the untaxed component that exceeds $1.445 million (the untaxed plan cap for the 2017-financial year). The untaxed component, which has attracted the 49 per cent tax, will be included as a tax-free component when it is rolled into the SMSF. The SMSF will pay tax at 15 per cent on the untaxed component for amounts up to $1.445m.

Doing the maths

On September 20, 2017, John asks his untaxed super fund to roll over his super totalling $1.6m into his SMSF. The money consists entirely of an untaxed component. The untaxed plan cap for the 2017-18 financial year is $1.445m. This means John's rollover amount exceeds the cap by $155,000. The untaxed fund will withhold tax of $75,950 ($155,000 x 49 per cent equals $75,950) on the amount in excess of $1.445m.

The amount reported by the untaxed super fund to the SMSF on the rollover benefits statement will show a tax-free component of $79,050 ($155,000 minus $75,950 tax payable equals $79,050) and an untaxed component of $1.445m ($1.6m minus $155,000 - the excess amount - equals $1.445m). John's SMSF will report the $1.445m as income in the SMSF's annual tax return and pay 15 per cent tax on the rolled-over money.

It is important to understand what sort of fund you are rolling money out of. It can come as quite a shock when the ATO takes a large chunk of your super if you aren't prepared for it.

Monica Rule is an SMSF specialist and author of The Self Managed Super Handbook. To read more of her news, go to www.monicarule.com.au.


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