One of the general and distinct characteristics of a superannuation fund (including SMSFs) compared to all other types of tax entities is, funds are being taxed at a concessional tax rate of 15%. That is why nowadays, superannuation funds particularly SMSFs, are becoming more and more popular as a tax saving device.
However, before various tax benefits are obtained out of a SMSF, it has to be a COMPLIANT. A fund is said to be compliant if, it is set up and operated in accordance with the Superannuation Industry (Supervision) (SIS) Act 1993, otherwise the ATO will regard the fund to be a non-complying.
The ATO will only reinstate the complying status of the fund once any breaches of the SIS Act have been rectified by the trustees.
There are numerous tax consequences when the ATO revokes the SMSF complying status, such as:
- The taxable income of a non-complying superannuation fund is taxed at 45% instead of 15%
- The fund will be treated tax-wise as if it is a foreign superannuation fund and a non-resident
- The fund will not be eligible for the following tax concessions available to a complying superannuation fund:
o Special CGT rules and CGT discount of 33%
o Unable to deduct death and disability insurance premiums
o Potential detriment deductions
o Exemption of income related to current pension liabilities
o Ability to transfer contributions tax liability
o Ability to exclude “last minute” employer contributions from assessable income
o Ability to invest in PSTs
o Employer contributions to a non-complying fund are not tax deductible and are subject to FBT
o Member’s contribution and spouse contribution do not qualify for a tax deduction
o Employer contributions to a non-complying fund do not satisfy the employer’s obligation under the SG Scheme
o No deductions are allowed for benefits paid.
Ways in which a fund can be found to be non-compliant
- The trustee has not lodged the fund’s income tax and regulatory returns for several years, despite requests for lodgement of outstanding returns from the Tax Office
- The trustee of an SMSF has made a loan to a relative representing 60% of the total market value of the fund's assets, with little prospect of recovery
- The trustee fails to pay regard to the Tax Office's previous action giving a clear indication that the trustee is not willing to operate within the regulatory regime
- Husband and wife trustees of an SMSF made loans to the husband's company (a "related party" of the SMSF) which was experiencing financial difficulties (AAT Case Re JNVQ and FCT [2009])
- The fund does not elect to become a regulated superannuation fund under SIS Act
- It is a non resident superannuation fund
- It is a regulated superannuation fund that has contravened a regulatory provision and failed the compliance test.
Taxation of previously complying funds
If a superannuation fund becomes non-complying fund in a certain taxable year, the fund’s assessable income for that year will be taxed at 45% and will include ordinary and statutory income (i.e. capital gains) from previous years. This will be calculated using the formula:
Market value of Assets Less Undeducted Contributions and contributions segment = taxable income x 45%
The above formula means that the tax concessions applicable to the fund when it was complying are effectively recouped.
If you would more information on compliance for SMSFs, contact us
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