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Self Managed Super Fund (SMSF) Article
Taxing super contributions
By Tony Negline.
This article may be out of date.
18th February 2009
One reader has asked the following question – "I have heard that the tax rules for super funds say that contributions made by an entity that is the trustee of a super fund is not subject to tax. I run my small business through a company which doubles as the trustee of my self managed fund. Does this mean my employer contributions aren't taxed?"
No doubt the answer to this is a question of great interest to many superannuation investors.
Before we give an answer we need to understand how the tax system applies to super funds.
At law trusts do not have any separate legal identity. To get around this the tax laws apply specific tax provisions to a super fund's trustee.
In reality a super fund's tax affairs are worked out in much the same way as all other taxpayers. That is, certain income and capital gains will be taxed after deducting appropriate expenses. Super funds are then taxed at the flat rate of 15% on the net income which is not being used to pay pensions. The amount of tax paid is then adjusted for tax offsets such as dividend franking credits.
The tax laws contain detailed rules that include some contributions as part of the income of super funds. These are five broad categories of taxed contributions but right now we'll look at only one which is that superannuation contributions will be taxed if they are made by a person or entity (for example, an employer) for the benefit of another person (for example, an employee).
This category of super contributions might include contributions made by one person for the benefit of someone else. For example an adult-child for their parent or one business who owes another money and it's agreed that the invoice will be settled via the debtor paying super contributions for the creditor's principals or employees.
Contribution specifically excluded from this category, and therefore tax-free, are:
- the contributions that a spouse makes for their spouse which cannot be claimed as a tax deduction by the contributor
- Government co-contributions
- Contributions made for a minor unless those contributions are made by a minor's employer
- Contributions for temporary residents
- Contributions made by an entity which was the trustee of a complying super fund when the contribution was made.
Our reader's question is about this last item.
This provision was inserted into the law in 1997 and was originally inserted into the Income Tax Assessment Act 1936. The reasoning for its insertion into the law over ten years ago was never been fully explained.
When the government began drafting the legislative changes for the Costello Better Super reforms it also decided to move 99 per cent of the income tax issues for super funds into the Income Tax Assessment Act 1997. When this amending legislation was first introduced into Parliament the item "contributions made by an entity which was the trustee of a complying super fund when the contribution was made" had been omitted.
During a Senate Committee hearing for this legislation the AXA Australia Financial Group asked that the provision be returned. AXA's submission to the committee said, "Although this provision, in AXA's experience, is not used frequently, there are circumstances in which a [super fund] trustee may make a contribution on behalf of a member. For example, if a trustee has received an amount of compensation or had legal costs awarded these amounts may need to be paid into the fund as a trustee contribution so that they can be distributed as earnings. Similarly, a trustee contribution may arise where a refund of fee (sic) is provided by a service provider in respect of a previous period to correct a billing error."
The Senate Committee asked the Association of Superannuation Funds of Australia if they thought AXA's arguments were valid. ASFA said that they were. In due course the Senate Committee suggested that the missing rule should be in the new law. The government agreed and it was later inserted into the tax law.
The ATO told me that in broad terms, this tax concession is designed "to stop double taxation. The money that a [super fund] trustee will make contributions with will have already been subject to the taxation regime under another tax rule. For example the provision might apply for a transfer from a fund being wound up to a new fund. In reality, the provision appears to exist more as a matter of caution, rather than day to day need."
It is a long held legal principle that entities such as corporations, trusts and individuals, can, and often must, act in different capacities. The employer contributions an entity makes are made in its capacity as an employer. The decisions made as a super fund trustee are made in that capacity.
The ATO said that to the best of their knowledge no taxpayer has asked for formal advice about applying this rule for ordinary employer super contributions. Without knowing the facts of a specific case, the ATO said that they would be unlikely to agree that ordinary employer contributions would ever be able to access this tax concession.Our readers question shows how closely some people research their tax obligations. Unfortunately the answer to the question appears to be no.
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