The tax benefits of SMSFs

Flexibility for SMSFs comes in all shapes and sizes.

3 strategies to boost the bottom line.

By Penny Pryor


Trustees start self-managed superannuation funds (SMSFs) for a variety of reasons. Most do it for increased control, but there are some tax benefits that members can accrue if they get the right advice from accountants who understand the issues.

Flexibility for SMSFs comes in all shapes and sizes. It isn’t limited to investment choice, but it also allows trustees to take advantage of the smaller size of their fund and the nimbleness that goes with it. Here are some tax strategies that can really boost the bottom line of an SMSF.

1. Capital gains tax benefits

If you’re a member of a large public-offer fund, the balance you see on your superannuation statement every half year or quarter isn’t necessarily the exact amount you have in your fund. If you’ve had your funds with a superannuation fund for a decent period of time, the chances are that your investments will have appreciated in value and a decent percentage of your total balance will be capital gains from your investments.

If we look at the example of “Peter” below, after 20 years of contributing to his superannuation fund he has accumulated a balance of A$250,000 from his individual contributions of A$100,000. Assuming a 50/50 split between income growth and capital gains by the fund, the amount that can be attributed to accumulated capital value is A$75,000. 

When Peter comes to retire and move into pension phase, the public offer superannuation fund will potentially need to liquidate his assets and pay the necessary capital gains tax (CGT) or at least set this aside in a provision. 

If the assets have been owned for more than 12 months, the amount of capital gains tax is discounted by one third (i.e. the effective tax rate is 15% x 0.67). In Peter’s example, the amount the fund needs to set aside for the deferred tax liability is A$7500.

•    Superannuation balance: A$250,000
•    Contributions: A$100,000
•    Accumulated income on investments: A$75,000
•    Accumulated capital value on investments : A$75,000
•    Capital gains tax payable: (15% of A$75,000) x 0.67 = A$7500
•    Amount super fund sets aside for deferred tax liability = A$7500

But if Peter had an SMSF, he may not need to liquidate any assets to move into the pension phase, which would mean an effective benefit of A $7500 to his fund.  

“The fact that the SMSFs can move to pension phase without triggering a CGT issue is enormous,” director and SMSF Specialist Adviser at NextGen Wealth Solutions, Liam Shorte, says. 

“Especially when you consider most portfolios are buy and hold strategies.”

An SMSF that bought BHP for A$10 in 2003 and moves to pension phase in 2013, when BHP is trading at A$38, would save A$2.80, or the 10 per cent CGT they would need to pay if they had to sell the asset. 

Director of education and professional standards at the SMSF Professional Association Australia (SPAA), Graeme Colley, says: “A lot of people talk about franking credits being an advantage, but the main one is moving from accumulation to pension phase and not paying capital gains tax.”

2. Insurance and special deductions

A little-known tax benefit that could potentially save a fund hundreds of thousands of dollars at a very stressful and emotional time is the ability to claim tax deductions for future service benefits. 

SMSFs are able to claim deductions for insurance premiums paid out of the fund but in the case of death or permanent disability, the fund might be better off claiming a deduction for the cost of paying out the benefit.

“The other tax benefit available to SMSFs is the Future Service Benefits Deduction, which is not available to larger funds and is a great alternative, or addition to, the Anti-Detriment Payment,” Shorte says. 

While the fund will need to forfeit the ability to claim future deductions on insurance premiums for all other members, it will very often be better off to claim the future service benefits. Consider the example of “Jane” below, which assumes that she would have another 15 years of service, i.e. retiring at age 65, and an expected total service period of 30 years.

•    Member of an SMSF for 15 years
•    Disabled in accident at 50
•    Total permanent disability (TPD) benefit payable A$1.75 million (accumulated super balance of A$750,000 and TPD insurance cover A$1 million)
•    Future liability deduction (A$1.75 million x 15 years of future service/30 years of total service) = A$850,000
•    The fund is therefore eligible to a large tax deduction of A$850,000, which can be carried forward into future financial years. 

Obviously, the other members of the SMSF would need to largely be in the accumulation phase in order to make use of the tax deduction.

3. Pro-active tax management

Due to their small size, SMSFs can be quite nimble when it comes to managing their tax affairs. Crystallising capital losses is an obvious example for year-end tax management. 

If the SMSF has realised capital gains during the financial year, and has other investments with capital losses, it may pay to crystallise some of those losses and offset the gains with the loss. The SMSF still has the option of buying the same shares back in the next financial year, but needs to remember the 30-day rule. This used to be called “bed and breakfasting” (the large public-offer funds have strict rules around how and when they can do this). 

As assets in the accumulation phase have different tax treatment to those in the pension phase, SMSFs can also manage the transition between accumulation and pension for the best tax outcome. 

For example, before a member is about to commence a pension they can examine the tax position of the assets in the fund. If there are some assets in a loss situation, it may make sense to dispose of them while still in the accumulation phase, thereby allowing other members still in the accumulation phase access to those losses. Of course, once the assets move into the pension phase, they are in an exempt tax status and the losses cannot be utilised.