AUSTRALIA

TAXATION –
ADVANCED
MODULE 3: SUPERANNUATION
TUTOR MATERIAL
AUSTRALIA TAXATION –
ADVANCED
MODULE 3: SUPERANNUATION

2
LEARNING OBJECTIVES

After completing this module, you should be able to:

• differentiate between different types of superannuation funds and
their associated compliance requirements;
• assess the effect of relevant superannuation and taxation rules
which govern contributions to superannuation funds;
• calculate the tax payable of a superannuation entity;
• assess the effect of relevant superannuation and taxation rules
which govern benefits derived from superannuation funds; and
• assess the impact of specific rules affecting Self-Managed
Superannuation Fund investment.

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AUSTRALIA TAXATION – ADVANCED:
CONCEPT MAP

Source: CPA Australia 2020.

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AUSTRALIA TAXATION –
ADVANCED
MODULE 3: SUPERANNUATION
PART A: TYPES OF SUPERANNUATION FUNDS
AND COMPLIANCE REQUIREMENTS
 Retirement

Age pension Compulsory Voluntary

Superannuation savings

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LEGAL BASIS FOR SUPERANNUATION

Legal basis for

superannuation

Superannuation
Industry
(Supervision) Act
1993 (Cwlth) (SISA)
Superannuation
Income Tax
Guarantee
Assessment Act 1997
(Administration) Act
(Cwlth) (ITAA97)
1992 (Cwlth) (SGA92)

Superannuation
Industry (Supervision)
Regulations 1994
(Cwlth) (SISR)

Regulators: Australian Prudential Regulation Authority (APRA) (for most superannuation

funds) and Australian Taxation Office (ATO) (for self-managed superannuation funds (SMSFs))

Source: CPA Australia 2020.

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COMPLYING VERSUS NON-COMPLYING
FUNDS
• For a superannuation fund to benefit from concessional tax treatment it
must be regarded as a ‘complying’ superannuation fund—where it has
received a notice of compliance from the Australian Prudential Regulation
Authority (APRA), or for a self-managed superannuation fund (SMSF),
from the Australian Taxation Office (ATO).
• Will be complying where it has fulfilled the necessary conditions
• Important to note that:
• the fund must be a ‘regulated fund’ under s. 19 of the Superannuation
Industry (Supervision) Act 1993 (Cwlth) (SISA)
• there are Australian residency requirements
• for a non-SMSF—trustees must not have breached any of the relevant
regulatory provisions, or if they did, they must pass the ‘culpability test’
• for an SMSF—trustee must not have breached any of the regulatory
provisions, or if they did, the ATO must have exercised their discretion
for it to continue to be regarded as a complying fund.

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DEFINED BENEFIT VERSUS
ACCUMULATION FUNDS
Types of funds

Defined benefit Non-defined benefit

Member’s interest is calculated in reference to a

specific formula that includes the member’s past Regarded as accumulation funds
or current salary, or some other specified amount

Unfunded—when a member makes

a withdrawal from the Contributions are invested and
fund, the government pays accumulate over time
their benefit from
consolidated revenue
Member’s balance is equal
to the underlying value of
such investments
Funded—fund owns underlying
assets that according to
actuarial estimates are sufficient
to pay future withdrawals
Source: CPA Australia 2020.

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SPECIFIC TYPES OF SUPERANNUATION
FUNDS
Figure 3.1: Different types of superannuation funds

Source: CPA Australia 2020.

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 Retail Funds Industry Funds

Public Sector Funds Corporate Funds

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COMPLIANCE REQUIREMENTS FOR
SUPERANNUATION FUNDS 1
• General provisions:
• complying superannuation fund must have a notice of
compliance from the regulator—to be eligible:
° the trustees must have not breached the regulatory
provisions, or
° for an SMSF, the ATO has decided that the fund be a
complying fund, or for a non-SMSF, the ‘culpability test’
has been fulfilled
• the culpability test will not be passed when either:
° all the members of the fund were directly or indirectly
knowingly concerned in, or party to the contravention, or
° the members of the fund that were innocent of the breach
would not suffer substantial financial detriment from the fund
being made non-complying.

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COMPLIANCE REQUIREMENTS FOR
SUPERANNUATION FUNDS 2
• Specific provisions relevant to particular funds:
• for an SMSF—compliance requirements for the trustees are:
° keep accounts and statements
° appoint an approved SMSF auditor
° lodge an annual return
° keep money and other assets of the SMSF separate from money
and assets owned personally by the trustees
° sign a declaration in the approved form that they understand their duties as
trustee of an SMSF
• for a registrable superannuation entity (RSE)—compliance requirements:
° appoint an eligible RSE auditor if required to do so under SISA or another
applicable statute
° comply with auditor requests for documents within 14 days of
the request
° appoint a suitably qualified actuary if required.

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AUSTRALIA TAXATION –
ADVANCED
MODULE 3: SUPERANNUATION
PART B: TAXATION OF CONTRIBUTIONS
CONCESSIONAL CONTRIBUTIONS
• Included in the assessable income of the fund—includes employer contributions, and
member contributions on which the member has claimed a tax deduction
• A taxed superannuation fund will pay 15% tax on the receipt of concessional
contributions
• Employer contributions will be concessional contributions if tax deductible and consist
of the following amounts:
• compulsory superannuation contributions being currently 9.5% of the employee’s
salary
• any amount the employer has to pay on top of the 9.5% mandatory contributions
due to an industrial agreement, and/or any amounts that they choose to contribute
above the mandatory 9.5% contributions
• amounts contributed due to a ‘salary sacrifice’ agreement between the employer
and employee
• A superannuation fund member can also make their own concessional contribution
into their superannuation account by notifying the trustee of the fund of their election

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CONCESSIONAL CONTRIBUTIONS
• There is an annual concessional contributions cap. For the 2019–20 tax year the
annual cap is $25 000 for each taxpayer
• Since 1 July 2018, taxpayers with a total superannuation balance of up to $500 000
can carry forward the unused portion of their annual cap for up to five years, meaning
that from 1 July 2019, some taxpayers will benefit from an increased concessional
contributions cap
• Concessional contributions cap:
• where a taxpayer exceeds their concessional contributions cap,
the excess will be subject to tax at their marginal tax rate, less a credit given for the
15 per cent concessional contributions tax paid by the superannuation fund
• will also be an excess concessional contributions (ECC) charge,
to recognise that tax has been paid later than it should have been.
• Taxpayers who have exceeded the concessional contributions cap have a choice
regarding whether to leave the excess money in their superannuation fund or
withdraw it. Up to a maximum of 85% of the excess contributions can be withdrawn

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Salary Sacrifice Example

Joan’s salary package is $180,000. She has been given a bonus of $7,000
which she wants to put into super. Her employer allows her to choose between
a salary sacrifice arrangement or after-tax contributions.

Salary sacrifice After-tax contribution

Payment made $7,000 $7,000
Less income tax (45% + 2% 0 (3,290)
Medicare levy)
Less contributions tax (15%) (1,050) 0
Net amount in super fund $5,950 $3,710
Investing Example

Peter is 55 and plans to retire at 60. He currently has $150,000 in

superannuation. His salary package is $210,000 before bonus. He is to receive
an annual bonus of $10,000.
Should he salary sacrifice the bonus into super or take the bonus as salary and
invest it?

Assumptions:
• Investment contribution made at start of the year and earnings added at end
of year
• Superannuation has gross return of 8%
• Managed investment has gross return of 15%, reinvested each year
• For simplicity ignore fund expenses, franking credits, CGT
 Investing Example
Superannuation Year 1 Year 2 Year 3 Year 4 Year 5
Opening balance - 9,078.00 18,773.30 29,127.89 40,186.59
Investment $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00

Less contributions tax (15%) (1,500,00) (1,500,00) (1,500,00) (1,500,00) (1,500,00)

Add fund earnings (8%) 680,00 1,406.24 2,181.86 3,010,23 3,894.93

Less earnings tax (15%) (102.00) (210.94) (327.28) (451.53) (584.24)
Closing balance 9,078.00 18,773.30 29,127.89 40,186.59 51,997.27

Managed investment Year 1 Year 2 Year 3 Year 4 Year 5

Opening balance - 5,721.35 11,897.55 18,564.75 25,762.00
Bonus to invest $10,000.00 $10,000.00 $10,000.00 $10,000.00 $10,000.00
Less PAYG (45% + 2%) (4,700.00) (4,700.00) (4,700.00) (4,700.00) (4,700.00)
Add income (15%) 795.00 1,653.20 2,579.63 3,579.71 4,659.30
Less income tax (45% + 2%) (373.65) (777.01) (1,212.43) (1,682.47) (2,189.87)
Closing balance 5,721.35 11,897.55 18,564.75 25,762.00 33,531.43
 Contribution Caps
Income year Contribution type Cap aged < 50 Cap aged 50 or over
2017-18 Concessional $25,000 $25,000
2016-17 Concessional $30,000 $35,000
2017-18 Non-concessional $100,000 $100,000
2014-15 to Non-concessional $180,000 $180,000
2016-17
2008-09 to Non-concessional $150,000 $150,000
2013-14

Excess concessional contributions included as taxable income,

taxed at marginal tax rate plus an excess concessional
contributions charge
Not a per fund limit – limit applies to all funds belonging to that
member
 Unused Concessional Cap Example

During 2018-19 to 2021-22 years Peter works part-time while studying. Balance been
growing with earnings and small contributions from part-time job but balance reduced
in 2020-21 due to negative returns that year. Peter has unused cap amounts for each
of the 2018-19 to 2021-22 years
2017-18 2018-19 2019-20 2020-21 2021-22
General contributions cap $25,000 $25,000 $25,000 $25,000 $25,000
Total unused available cap N/A $0 $22,000 $44,000 $69,000
accrued
Maximum cap available $25,000 $25,000 $47,000 $69,000 $94,000
Super balance 30 June N/A $480,000 $490,000 $505,000 $490,000
prior year
Concessional nil $3,000 $3,000 nil nil
contributions
Unused concessional cap $0 $22,000 $22,000 $25,000 $25,000
amount accrued in the
relevant financial year
 Excess Concessional Contribution Charge
Applied to the additional income tax liability arising due to excess concessional
contributions (included in tax return)
Charge because tax collected later than normal income tax
Calculation of charge period:
• Start of the income year in which the excess concessional contributions made
• Ends day before the tax is due to be paid as per income tax assessment for that
year
Formula uses base interest rate for the day plus uplift factor of 3%

Quarter Annual rate Daily rate

Jan-March 2021 3.02% 0.008273972602739%
Oct-Dec 2020 3.10% 0.012958904109589%
July-Sep 2020 3.10% 0.012958904109589%
April-June 2020 3.89% 0.010628415300546%
LOW INCOME SUPERANNUATION TAX
OFFSET AND DIVISION 293
• Taxpayers on lower incomes are eligible for the low-income superannuation tax offset
(LISTO). To be eligible for the LISTO, the taxpayer must:
• have an adjusted taxable income not exceeding $37 000
• have at least 10% of their income from employment and/or business activities, and
• be under 71 at the end of the financial year.
• The offset equals 15% of their concessional contributions, with a maximum of $500
• LISTO is paid into the account of eligible superannuation members; it effectively
refunds the concessional contributions tax that has been paid.

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 $

Salary 35,000

Super Guarantee contributions 3,325

Contributions tax 500

LISTO Amount

Salary 30,000

Super Guarantee contributions 2,850

Contributions tax 428

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LOW INCOME SUPERANNUATION TAX
OFFSET AND DIVISION 293

• Division 293 of the Income Tax Assessment Act 1997 (Cwlth) (ITAA97)—those on
higher incomes are subject to an additional 15 per cent tax rate on their taxable
contributions, which will be some or all of their concessional contributions.
• Taxable contributions are subject to this surcharge if the total of ‘low tax contributions’
and ‘income for surcharge purposes’ for that person exceeds $250 000 for an income
year

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In 2019/20, Avni was assessed by the ATO as having Division 293 income of
$315,000 and $25,000 in Division 293 super contributions.
Avni’s super fund paid the normal contributions tax of $3,750 on her contribution
when it was paid into her super account (15% x $25,000).
As Avni’s income is over the $250,000 threshold, she is also liable for Division 293
tax on her super contribution.
Her taxable contribution for Division 293 tax purposes is whichever is
the lesser amount:
• Division 293 super contributions = $25,000
• Income plus Division 293 super contributions above the $250,000 threshold is:
$315,000 + $25,000 = $340,000
$340,000 – $250,000 = $90,000
The ATO calculates the lesser amount for Ayumi for Division 293 purposes in
2019/20 is $25,000, as this amount is less than $90,000.
As Avni is over the threshold for Division 293 tax purposes, she will be liable for an
additional $3,750 in Division 293 tax on her super contribution (15% x $25,000).
This means the total tax paid on her $25,000 super contribution is $7,500 (30% x
$25,000, which is made up of 15% taxed when it enters the super fund and an
additional 15% Division 293 tax).

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NON-CONCESSIONAL CONTRIBUTIONS 1

• Contributions that are not tax deductible are not assessable to

the superannuation fund.
• Non-concessional contributions cap—comparatively more lenient
• The annual non-concessional contributions cap is legislated as being
equal to four times the concessional contributions cap, meaning that it is
$100 000.
• Those who were under 65 years at any time during the tax year can use
the three-year ‘bring-forward’ provisions, which entitle them to make up to
$300 000 worth of non-concessional contributions in that year.
• Superannuation account holders who have a total superannuation balance
cap of at least $1.6 million cannot make further non-concessional
contributions.
• The total balance is calculated by adding the balance of the accumulation
funds, plus, if the member has superannuation income streams, the
transfer balance of their transfer balance account

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NON-CONCESSIONAL CONTRIBUTIONS 2

• Where the taxpayer has utilised the small business capital gains tax (CGT)
concessions, in some instances the gain subject to the concessions can
be contributed to superannuation as a non-concessional contribution, and
not be subject to the regular annual non-concessional contributions cap.
• The CGT cap applies to capital gains that are subject to either:
• the small business retirement exemption (the amount subject to this
exemption will, to the extent contributed to the superannuation fund, be
subject to this CGT cap), or
• the small business 15-year exemption (any amount up to the capital
proceeds of the small business asset subject to this exemption can be
contributed and counted towards the CGT cap).
• Lifetime CGT cap is applicable which is $1 515000 for the 2019–20 tax
year.

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Contribution Caps

Income year Contribution type Cap aged < 50 Cap aged 50 or over
2017-18 Concessional $25,000 $25,000
2016-17 Concessional $30,000 $35,000
2017-18 Non-concessional $100,000 $100,000
2014-15 to Non-concessional $180,000 $180,000
2016-17
2008-09 to Non-concessional $150,000 $150,000
2013-14
Non-Concessional Cap
CGT Cap

Income Year CGT Cap Amount

2020-21 $1,565,000

2019-20 $1,515,000

2018-19 $1,480,000

2017-18 $1,445,000

2016-17 $1,415,000

2015-16 $1,395,000

2014-15 $1,355,000
NON-CONCESSIONAL CONTRIBUTIONS 3

• Co-contributions scheme:
• lower income earners are eligible to participate in the co-contributions
scheme, where the government matches 50 cents for every dollar of
non-concessional contributions made to a complying superannuation
fund.
• Spouse contributions:
• taxpayers are allowed to make contributions to a spouse’s
superannuation account for which the contributor receives an offset:
° equal to 18 per cent of contributions, up to $3000 of annual
contributions, meaning that the maximum amount is $540 ($3000 ×
18%)
° subject to means testing on the recipient spouse’s income. Only
incomes of up to $37 000 qualify for the full $540 offset. The offset
amount is reduced for every $1 earned over $37 000 so that no
offset is available where spouse’s income if $40 000 or more

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Tamara works part-time as a nurse and earns a salary of $30,000 per
annum. Tamara has some savings and makes an after-tax voluntary
contribution of $1,000 to her super. This money is invested in her
super tax-free. Tamara makes the contribution before 30 June. After
lodging her tax return, the Government also pays a $500 co-
contribution directly to her super – giving her retirement savings an
additional boost.

Steven and Amy are in a de facto relationship. Steven, 30, works as

a teacher and earns $75,000 annually. Amy, 28, works casually and
earns $37,000 a year.
Steven has decided to contribute $120 a fortnight into Amy's super
account ($3,120 a year). Because Amy is a low-income earner, the
first $3,000 of Steven's contribution qualifies for the maximum tax
offset of 18%. Steven receives the full tax offset, reducing the tax
payable on his income by $540.

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CONTRIBUTION AGE LIMITS
Is the contribution a mandatory employer
9.5 per cent contribution, or some other
contribution that employers are required to
make under industrial agreements?

No Yes

Is the member
No age limit
aged over 64?

No Yes

Is the member
No age limit aged between
65 and 74?

No Yes

Must pass a ‘work test’ for concessional

Is the member or non-concessional contributions that
aged 75 or above? are not mandatory employer
contributions unless prior year total
superannuation balance is less than
$300 000

Cannot have other concessional or

non-concessional contributions
made into their accounts
Source: CPA Australia 2020.

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AUSTRALIA TAXATION –
ADVANCED
MODULE 3: SUPERANNUATION
PART C: TAXATION WITHIN THE SUPERANNUATION FUND
CONTRIBUTIONS RECEIVED
BY THE SUPERANNUATION FUND

Contributions

Assessable Non-assessable

Taxed superannuation fund

Not subject to tax when
pays tax on concessional
deposited into the
contributions at the rate
superannuation fund
of 15 per cent

Tax-deductible in the hands

Not tax-deductible—
of the contributor—in most
typically paid out of
cases the member gains
after-tax income
a net tax benefit
Source: CPA Australia 2020.

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ACCUMULATION AND INCOME STREAM
PHASES
• When a taxpayer is working, their superannuation account is in its
accumulation phase.
• Three types of superannuation income streams:
1. account-based pensions—similar to an accumulation account
in that
a pool of money is invested in a basket of investments
2. annuities—involves the fund member giving up part of their
accumulation balance in exchange for an income stream
3. innovative income streams—conditions must be fulfilled:
° taxpayer must have satisfied a condition of release
° once the payments have commenced, they continue
throughout the life of the member and cannot be deferred.
° limited in how much can be commuted back to a lump sum.

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TRANSFER BALANCE CAP

• As of 1 July 2017, there is a $1.6 million limit to how much each individual
can have in their superannuation balance supporting a superannuation
income stream.
• The legislation operates by deeming all taxpayers that have a
superannuation income stream to have a ‘transfer balance account’ that
cannot exceed $1.6 million.
• If this $1.6 million limit is exceeded, then the earnings on the excess are
subject to tax of 15% for the first breach, and 30% for subsequent
breaches.
• Credits to a superannuation member’s transfer balance account include
the balance of superannuation income streams that existed on 1 July 2017
and the opening balance of a new superannuation income stream created
on or after 1 July 2017.
• Debits from a transfer balance account include amounts commuted into a
lump sum and amounts rolled back into accumulation phase.

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Richard started a pension valued at $1.6 million on 1 July 2017. This uses
up all his personal transfer balance cap.

By 1 July 2019, the value of that pension account had grown to $2.0
million. As this growth is due to investment earnings, Richard has not
exceeded his personal transfer balance cap.

On 30 June 2020, the value of that pension account had fallen to $1.0
million due to the impact of COVID-19 on the assets supporting the
pension. Richard cannot ‘top up’ his pension account with money he holds
in his accumulation account because he has already used all his personal
cap space.

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TAXATION OF SUPERANNUATION FUND
INVESTMENT EARNINGS
• Assessable income—superannuation funds usually invest their
accumulation accounts into a basket of investments, and returns
are taxed at the rate of 15 per cent. Superannuation earnings can
benefit from franking credits.
• CGT discount—superannuation funds are entitled to a 33.3 per
cent CGT discount.
• Exempt income—earnings from assets supporting superannuation
income streams are tax-free because they are deemed to be
exempt income.
• Non-arm’s length income—generally applies to cases where due
to a non-arm’s length dealing, earnings have been unduly shifted
from outside superannuation to inside the superannuation vehicle
to take advantage of the lower superannuation earnings rates.

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DEDUCTIONS TO ACCUMULATION FUNDS

• Operating expenses—superannuation funds can deduct operating

expenses (e.g. administration, consultants and audits, account keeping
and investment management fees).
• Superannuation funds can deduct insurance premiums for the
following cover:
• life insurance (but if it includes an investment component then
only a partial deduction is allowed)
• terminal medical conditions of the member
• total and permanent disability (TPD)
• income replacement due to temporary incapacity.
• Benefits—a superannuation fund can elect to deduct its future liability to
pay insurance benefits as an alternative to deducting its premiums.
• Outgoings relating to exempt income and non-arm's length income—to the
extent outgoings are related to non-arm’s length income, they can be used
to offset it, so that only the net amount is subject to the 45 per cent tax
rate.

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The trustee of a complying super fund incurs the custodian's fee of
$2,000 in respect of specific assets. The fund determines that $1,500
of the fee is for custodial functions for segregated current pension
assets producing tax exempt (or non-assessable) income, and $500
relates to other assets producing assessable income.
The fund should apportion the fee according to those distinct and
severable parts – that is, $500 is fully deductible as it is incurred in
gaining or producing assessable income and $1,500 is not deductible
as it is incurred in gaining or producing non-assessable income.

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TAXATION CONSEQUENCES OF BECOMING
A NON-COMPLYING FUND
• A fund can lose its complying fund status if the relevant conditions
are no longer fulfilled (i.e. a non-SMSF breaching the regulatory
provisions and failing the culpability test).
• A superannuation fund that becomes non-complying loses its
ability to benefit from concessional tax treatment:
• earnings made by the fund taxed at the top tax rate of 45 per
cent
• amounts contributed to the fund by the employer or the member
will not generally benefit from a tax deduction.

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AUSTRALIA TAXATION –
ADVANCED
MODULE 3: SUPERANNUATION
PART D: TAXATION OF SUPERANNUATION BENEFITS
CONDITIONS OF RELEASE AND
AUTHORISED PAYMENTS
Terminal Permanent
medical and temporary
condition incapacity
Former
Death temporary
resident

Attaining Severe
preservation financial
age hardship

Reaching Compassionate
age 65 grounds

Retirement
Conditions Financial
difficulties due
of release to COVID-19

Source: CPA Australia 2020.

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TAXATION OF LUMP SUMS 1

• Taxable component from Figure 3.2: Taxable and tax-free components

an untaxed
superannuation fund is
regarded as ‘element
untaxed’
• Taxable component from
a taxed superannuation
fund is regarded as
‘element taxed’
• Tax-free component—
not subject to tax, so not
split up into ‘element taxed’
and ‘element untaxed’

Source: CPA Australia 2020.

46
TAXATION OF LUMP SUMS 2

• Benefits where there is an ‘element taxed’

47
TAXATION OF LUMP SUMS 3

• Benefits where there is an ‘element untaxed’

48
TAXATION OF INCOME STREAMS 1

• When members satisfy a condition of release they can choose to take

their benefits in the form of a lump sum and/or income stream:
• in some instances, only an income stream option is available, such
as when a ‘transition to retirement income stream’ (TRIS) is taken
out.
• Income stream benefits where there is an ‘element taxed’

49
TAXATION OF INCOME STREAMS 2

• Income stream benefits where there is an ‘element untaxed’

50
SUPERANNUATION DEATH BENEFITS

• When a superannuation fund member dies, certain persons receive the

deceased’s balance plus any additional death benefit cover.
• A superannuation fund member who wishes to be certain who receives
their superannuation death benefits, can, as long as this is permitted in the
trust deed of the fund, make a binding death benefit nomination.
• Taxation of superannuation death benefits:
• lump sum—depends on whether recipient is a ‘death benefit dependant’
(i.e. the member’s child(under 18), spouse, former spouse, or someone
who is in an ‘interdependency relationship’ with the member, or a
‘financial dependant’)
• income stream—known as a ‘reversionary pension’. The recipient
must be:
° dependant under s. 10 of SISA, and
° if they are the member’s child—must be under 18, under 25
and a financial dependant, or have a permanent disability.

51
 Lump Sum Income stream
Recipient is a Recipient is not The deceased The deceased
death benefit a death benefit was at least 60 was under 60
dependent dependent years of age at years of age at
time of death, the time of
or the death, and the
beneficiary is at beneficiary is
least 60 years currently under
of age at the 60 years of age
time of receipt
Taxable 15% tax rate Tax free Marginal tax
component – rates less a
element taxed 15% offset
Taxable 30% tax rate Marginal tax Marginal tax
component – rates less a rates
element 10% offset
untaxed
Tax free Tax free Tax free Tax free Tax free
component

52
MAXIMISING TAX-FREE COMPONENTS

• Useful for a superannuation fund member to maximise the tax-free

component percentage of their account
• Recontribution strategy—member withdraws a lump sum from
their superannuation account and redeposits it as a non-
concessional contribution

53
John, 59, has $400,000 in his super fund with $200,000 tax-free and $200,000 taxable
component. Assuming he is eligible to withdraw his superannuation balance, he could
proportionally withdraw $300,000 from his superannuation as follows:
Tax components Tax implications
$150,000 tax-free component (50%) Tax-free
$150,000 taxable component (50%) Tax-free up to $215,000 of taxable
component (low-rate cap for 2020/21)
$300,000 total super Nil tax payable

As John is eligible to re-contribute the full $300,000 into super, his revised
superannuation balance will consist of 75 per cent tax-free component, rather than the
original 50 per cent, as follows:

Tax-free
Taxable component
component
Initial superannuation balance $200,000 $200,000
Withdrawal $150,000 $150,000
Balance in fund $50,000 $50,000
Add re-contributed amount $300,000 $0
Balance after re-contribution $350,000 $50,000
54
MAXIMISING TAX-FREE COMPONENTS

• Locking in tax-free percentages:

• when an account-based pension is created, it adopts the
taxable and tax-free percentages of the accumulation fund
• percentages are locked in for the life of the account-based
pension:
° member can lock in a relatively favourable tax-free
percentage by converting the accumulation fund into an
account-based pension.

55
In January 2017, Christopher is 66 years old, still working and is a member of an
SMSF. In his SMSF, Christopher’s superannuation interest consists of a tax free
component of $300,000 and a taxable component of $200,000. His total
superannuation balance is $500,000. This means the proportion of his
superannuation interest that consists of the tax free component is 60% and the
taxable component is 40%.
Christopher commences an account-based pension with just $250,000 of his total
superannuation interest. At the commencement of this pension, the tax free
component is $150,000 (or 60%) and the taxable component is $100,000 (or
40%) since his total superannuation interest before commencing the pension was
60% tax free component and 40% taxable component.
If the value of the assets supporting the pension were to rise, the percentages
representing the tax free and taxable components do not change. Thus if
Christopher’s pension balance, which started at $250,000, were to rise to
$400,000 after three years due to his savvy investment decisions, his tax free and
taxable components would retain the same proportion as at the pension’s
commencement and will be as follows: a tax free component of $240,000 (or
60%) and a taxable component of $160,000 (or 40%).
Of course, if the value of the assets supporting the pension were to fall to say
$100,000, then the proportion of the tax free and taxable components will still
remain the same as at commencement (ie, $60,000 tax free and $40,000
taxable).
56
AUSTRALIA TAXATION –
ADVANCED
MODULE 3: SUPERANNUATION
PART E: SELF-MANAGED SUPERANNUATION FUNDS
ESTABLISHING A SELF-MANAGED
SUPERANNUATION FUND
• Can have up to four members—but not people who are in
employee/ employer relationships with each other unless they are
related. Main steps in setting up an SMSF
Make an initial
Decide whether to
contribution into the
have a corporate Sign and execute
Prepare trust deed self-managed
trustee or be the the trust deed
superannuation fund
individual trustees
(SMSF)

Trustees or directors
of the corporate trustee
Trustees sign the sign a trustee Open a bank account Trustees decide on an
trustee consent form declaration within for the SMSF investment strategy
21 days of becoming
trustees/directors

Apply for a tax file

Register fund with the Make election to Register for goods
number (TFN) and an
Australian Taxation Office be a complying and services tax
Australian Business
(ATO) superannuation fund (GST), if required
Number (ABN)

Source: CPA Australia 2020.

58
TRUSTEE RESPONSIBILITIES 1

Resolve any conflict

between the duties of
the trustee to the
beneficiaries as against
the duties of the trustee Formulate an
to others or their own investment strategy
Act in the best interests, in favour with regards
interests of of beneficiaries to the circumstances
beneficiaries
of the superannuation
fund

Exercise the same

degree of care, skill and
diligence as an ordinary
Have a strategy
prudent person would
for dealing with
exercise in dealing with
any reserves
property of another for
the fund has
whom the person felt
morally bound to
provide

Trustee Allow beneficiaries

access to relevant
Act honestly
responsibilities information or
documents

Source: CPA Australia 2020.

59
TRUSTEE RESPONSIBILITIES 2

• Trustees must be careful to be familiar with the legislative rules,

including accepting contributions and only paying benefits when a
condition of release has been satisfied.
• They must also:
• keep and retain certain records for at least:
• 10 years—minutes of trustee meetings, changes of trustees
and trustee declarations
• five years—annual statement of the financial position,
operating statement, annual lodged returns and accurate
accounts and statements.
• lodge an annual tax return for the fund
• appoint an approved SMSF auditor annually—must be done no more
than 45 days before the due date for lodging the SMSF’s annual return
• provide documents to the auditor when requested.

60
TAXATION OF SELF-MANAGED
SUPERANNUATION FUNDS
• In general, SMSFs are subject to the same taxation regime as other
superannuation funds but there are taxation issues that are particularly
relevant to the running of SMSFs:
• non-arm’s length income
• exempt income for earnings supporting an income stream.
• Non-arm’s length income where there is a scheme in which the parties
were not dealing at arm’s length and as a result of the scheme:
• income of the fund is of a greater amount than would have been
derived in a hypothetical situation where the parties were dealing with
each other at arm’s length, and/or
• in gaining or producing the income, the fund incurs a loss, outgoing or
expenditure that is less than what might be expected in an arm’s length
transaction (or the fund does not incur a loss, outgoing or expenditure).

61
For the 2020-2021 income year, Mira as trustee of her Self-Managed
Superannuation Fund (SMSF) engages an accounting firm, where
she is a Partner, to provide accounting services for the fund. The
accounting firm does not charge the fund for those services.
For the purpose of Subsection 295-550(1) the scheme involves the
SMSF acquiring the accounting services under a non-arm’s length
expenditure (being the nil amount incurred for the services). All the
SMSF income for the 2021-2022 income year is non-arm’s length
income.

62
EXEMPT INCOME FOR EARNINGS
SUPPORTING AN INCOME STREAM
• Earnings of accumulation accounts are subject to 15% tax,
whereas the earnings of accounts supporting an income stream
(including an account-based pension) are exempt from tax
• Superannuation funds, including SMSFs, can use one of two
methods to ascertain which of the earnings are taxable and which
are exempt current pension income (ECPI):
• segregated method where different assets are used for the
income stream and accumulation accounts.
• non-segregated method which involves the same assets
providing returns to the accumulation and income-stream
accounts, and the returns being apportioned to both, using a
prescribed formula.
Average value of current pension liabilities
Average value of superannuation liabilities

63
 SEGREGATED UNSEGREGATED

ACCUMULATION
ACCUMULATION

INCOME
STREAM INCOME STREAM

64
RULES AFFECTING SELF-MANAGED
SUPERANNUATION FUNDS

Loans and Duty to invest

other financial on an arm’s
assistance length basis

Limited
In-house
recourse
asset
borrowing
restrictions
arrangements

Acquisition of
Sole
purpose test SMSF assets from
member or
related parties

Source: CPA Australia 2020.

65
66
CONSEQUENCES OF BREACHING THE
RULES
Suspending or
removing the
Disqualifying
trustees Freezing the
individual trustees,
assets of the fund
and prohibiting
as part of an
them from acting
investigation
as trustees

Undertaking
from the trustee Civil
to rectify the penalties
contraventions

Making the
Consequences Criminal
fund non-
of breach penalties
complying

Source: CPA Australia 2018.

67
REVIEW

• Part A provided an overview of the regulatory environment

and legislation that superannuation funds operate under.
• Part B discussed superannuation contributions.
• Part C discussed how to ascertain the tax liability of
superannuation funds.
• Part D described how superannuation benefits are taxed
upon their withdrawal.
• Part E discussed SMSFs.

68