SMSF Technical Education & Strategies

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Contributions Tax

Contributions tax is an interesting subject, as there is a bit of misinformation around it. Essentially, when contributions are made to a SMSF where any party (either an employer or the individual) is claiming a tax deduction for the contribution, then the so-called contributions tax will apply. These contributions become known as ‘Concessional Contributions’.

Now here’s the thing. Many people believe that there is contributions tax of 15% that applies to these contributions. This is not entirely correct. The fact is that there is not any such thing as a contributions tax. What actually happens is these 'concessional contributions’ form part of the assessable income of the super fund. For example, if a super fund earns $100 in income from dividends & interest for the year, and has ‘concessional contributions’ of $50, then the total assessable income of the fund is $150. The fund may have some tax deductions for expenses etc, (lets say $20 in this example), which leaves $130 in taxable income. It is this figure that the 15% tax rate is applied to.

Reduce the tax with franking credits

But what if the SMSF has some imputation credits from Australian share dividends? These can be used to offset the amount of tax payable. Given that fully franked dividends carry a 30% imputation credit, and the income tax rate in super is only 15%, these imputation credits are very powerful in reducing the overall tax rate of the fund, which includes those original taxable contributions. So to say that there is a 15% contributions tax on “concessional contributions’ is not entirely accurate. It is more accurate to say that:

" Those contributions that are made to a SMSF where a tax deduction has been claimed (known as ‘Concessional Contributions’), will form part of the assessable income of the fund. After taking away any deductible expenses for the fund, the remaining taxable income of the fund will be taxed at 15%. Further to this, if the fund has received any imputation credits from dividends received, these can be used to reduce the amount of tax payable. It may even eliminate the tax payable altogether. In fact, instead of paying tax, you may actually end up with a refund”.

The SMSF advantage

What we have described above is one of the key benefits of a SMSF, in that you have more tax control over your account. Most commercial super funds tend to take out this 15% contributions tax at the time of contribution, eliminating your ability to reduce them with franking credits. In their defense, this is necessary to enable the efficient administration of these large super funds.