TAX NEWS - June 2010

Australia tax deductions: Time for a wealth check

The strategy To get my self-managed super fund (SMSF) in order for the financial year end.

How do I do that? With the fund's annual accounts and audit coming up, June is the time for financial housekeeping of your fund. You need to ensure everything is in order for June 30 because you could lose valuable tax benefits if it's not.

How does that work? In order to receive concessional tax treatment, your super fund must comply with the relevant rules and regulations. For example, self managed funds are only allowed to hold up to 5 per cent of their assets in in-house investments - such as a loan to, or investment in, a related party - and are required to have a formal investment strategy that they adhere to.

Volatile investment markets could have inadvertently increased your in-house assets ratio (by reducing the value of other investments) or caused your asset allocation to drift from that specified in your investment strategy. By becoming aware of this now, you can address the problem before year-end. The director of Partners Superannuation Services, Martin Murden, says if your business is renting premises from your fund, you should also ensure the rent is paid for the year and the lease is up to date.

Murden says if your fund is paying a pension, it's also important to ensure the minimum pension payment is made before the end of the year. The current rules require funds to pay a pension of at least 2 per cent of your account balance (as of June 30, 2009) if the pensioner is 55 to 64; 2.5 per cent if 65 to 74; and 3 per cent to 7 per cent for pensioners older than 75.

The technical director at Self-Managed Super Fund Professionals' Association of Australia, Peter Burgess, says if the minimum payment is not made, the assets supporting the pension may no longer be exempt from tax. That's a heavy penalty for forgetting to pay yourself some income.

If your fund is paying a transition to retirement pension (which can be paid to someone aged 55 to 64 who is still working), Murden says a maximum pension payment of 10 per cent of the account balance also applies.

Pension payments are not required to be made on a fixed schedule, so if your fund hasn't made the payment yet, there's still time to do a one-off lump sum payment before the end of the month.

Murden says people planning to retire in July should also advise their fund's trustee whether they will be claiming a tax deduction on any personal contributions made to the fund this year. Once the pension has started, it is not possible to change the amount to be treated as tax-deductible, so your deduction may be lost if the proper notification isn't made.

Are there other traps I should be aware of? Burgess says extra care needs to be taken if you're considering making a large contribution to super as so-called excess benefits can be hit with heavy tax penalties.

He says if you exceed the limit on deductible or "concessional" contributions, the excess is counted towards your non-concessional contributions cap of $150,000, or $450,000 spread over three years.

Burgess says fund expenses paid by a fund member are also included in the concessional contributions cap.

Excess capital gains tax small business payments contributed to your super fund are counted against your non-concessional contribution cap, while excess employer termination payments rolled over to your super fund under the transitional rules are counted against your concessional contributions cap. This may in turn lead to some of that money being counted against your non-concessional contribution cap.

If you intend to claim a tax deduction for your contributions, Burgess says you should check that the deduction is legitimate. If it is later disallowed by the Tax Office, this can also affect your compliance with the contribution limits.

Contributions also need to be credited to your account before June 30 to be eligible for a tax deduction this year (and to be counted in the caps) this year.

Burgess says trustees should also ensure expenses are actually incurred or paid before June 30 to claim a tax deduction this year. He says trustees should be pro-active about claiming tax benefits and seeking advice before the financial year-end.