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Self Managed Super Fund (SMSF) Article
Break the rules and you may pay dearly
By Tony Negline.
This article may be out of date.
5th August 2009
Without tax concessions superannuation would be pointless. Why would anyone contribute to an investment vehicle that for many years denies access to your capital without good incentives? It's important you don't miss the opportunity of these tax concessions.
The super tax breaks potentially happen at different stages – when the contributions are made, during the life of the investment and when the money is withdrawn.
There are four different concessions at the contribution stage – tax deductions for employer contributions, tax deductions for member contributions, a rebate for spouse contributions and the government co-contribution.
Each of these concessions has their own qualification criteria. This article will concentrate on the concessions available when employer contributions are made and what they have to do to ensure they can access these concessions.
Employers are allowed a tax deduction for super contributions made either to fund retirement benefits for employees or to fund death benefits for the employee’s dependants.
An employer will not be allowed a deduction unless an employee is engaged in producing income for the employer or is engaged in the business of the employer. Directors are specifically defined as employees hence an employer would be allowed a deduction for contributions made for these people.
Before contributing to a fund for the first time, an employer must take reasonable steps to obtain written confirmation from the super fund that the fund is a resident regulated super fund and can accept employer super contributions. A resident regulated super fund is a fund which is an Australian Superannuation Fund, which is a definition that we won't look into now, and the trustees of that fund have irrevocably elected to be bound by the super laws.
Any employer who doesn’t bother with this step will risk loosing the tax deductions for all contributions made to that fund.
Not getting a tax deduction for employer super contributions would be bad enough but without this information an employer might also have to pay Fringe Benefits Tax for contributions paid to the fund. Clearly employers offering their employees Choice of Fund after 1 July 2005 should take careful note of this point and make sure that they have this document on file for super contributions made to a fund chosen by an employee.
An employer will not get a tax deduction for super contributions made for an employee who has turned 70 and those contributions are made 28 days after the month in which the employee turned 70.
An employer’s ability to claim a deduction for an employee may be limited if the business is subject to the Alienation Personal Services Income provisions which potentially taxes contractors and consultants as individuals even if the income is earned via a trust, partnership or company.
Employees who receive a salary package often have to decide whether or not they should sacrifice some of their salary by increasing their contributions to super – hence the term ‘salary sacrifice’.
In Tax Ruling 2001/10 the ATO provide some guidance. Salary sacrifice arrangements will only be valid where an employee agrees to receive ‘salary’ as some other type of benefit before the entitlement has been earned. An employee should therefore only agree to sacrifice future remuneration because an entitlement will have been earned even if it would not be paid until a later time.
When a salary sacrifice arrangement is not structured properly, the employee will be deemed to have been paid salary and Pay As You Go tax would be payable by the employee.
The tax ruling says that as far as the ATO is concerned, employees are free to sacrifice as much as they like however the ruling goes on to warn employers that they meet all obligations, including minimum salary levels of industrial awards or agreements that govern their workplaces.
It is important to realise that under a salary sacrifice arrangement, although the employee has foregone the salary, the contribution is deemed to be an employer contribution and is taxed in the year it is made.
Salary sacrifice arrangements are potentially very tax effective for investors who have average tax rate is greater than the upfront taxes imposed on the employer contributions. Based on the income tax rates that apply from 1 July 2009, this includes anyone who earns more than $44,000 and isn’t eligible for any other tax reduction items such as the Family Tax Benefit or the Government Co-contribution.
For those aged under 50 on the last day of the financial year (30 June 2010 for most people) the first $25,000 of all personal contributions claimed as a tax deduction and all employer contributions, including those which can't be claimed as a tax deduction, are taxed at 15% by the super fund.
Those aged at least 50 on 30 June 2010 have access to a $50,000 threshold. On 30 June 2012 this threshold will disappear and the $25,000 threshold will apply to everyone.
These amounts were formerly $50,000 and $100,000 respectively but were controversially adjusted in the May 2009 Federal Budget.
Many retail super funds will deduct this tax as soon as a contribution is made. In most cases these super funds will not have to pay this tax to the Tax Office immediately and have little reason to deduct this tax immediately except for administrative convenience. Because of the way the Pay As You Go system collects tax from Self Managed Super Funds, many of these funds do not deduct this tax for many months after the end of a financial year.Super contributions above these thresholds are called Excess Concessional Contributions. They are taxed at an additional 31.5% tax which is a liability belonging to the super fund member but can be passed onto the super fund.
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