Understanding your SMSF and tax

Superannuation is such a tax-effective investment vehicle it is easy for the members of a self-managed super fund to overlook the need to manage the fund's ongoing tax situation.

Among the tax issues SMSFs should take into account are:

• How much emphasis to put on receiving fully franked dividends.
• The tax benefits of buying and holding rather than trading shares and other investments.
• How to maximise the tax-effective returns to be made from share buybacks.
• Reducing the risk of your estate paying de facto death duties.

"Being able to maximise tax benefits is one of the major attractions of running your own self-managed super fund," says Andrew Yee, director of wealth management with accountancy group HLB Mann Judd.

Fully franked dividends, for example, carry a 30 cent tax credit for every dollar of dividends.

As a result an SMSF in the accumulation phase ends up with a 15 cent tax credit for every dollar of fully franked dividends, while a fund in the tax-free pension phase gets all the 30 cent credit.

"It is likely some SMSFs that have shifted from shares into cash in recent years haven't taken proper account of the tax credits lost as a result," says Yee.

The second issue - holding assets for the long term rather than turning them over more frequently - is a tax-effective strategy only in the accumulation phase.

During this period an SMSF usually will pay an effective tax rate of 10% on all capital gains made on assets that have been held for at least 12 months.

Rather than buying and selling a lot, it makes good tax sense, all else being equal, to hold on for the long term, preferably until the pension phase, since in most cases no tax will be payable when the assets are sold.

Share buybacks may or may not deliver benefits in the accumulation phase but are almost always a very tax-effective way to take profits for those receiving an account-based pension.

As Yee explains, they usually are structured so that, while the buyback price is lower than the market price, a lot of the payout you receive is in fully franked dividends.

Provided these more than compensate for the reduced price, it makes sense to participate in the buyback.

As for de facto death duties, these mainly arise when a person's super is paid out to non-dependent beneficiaries. In such cases the "taxable" part of your super - mainly contributions that benefited from tax-concessions - is taxed at 16.5%.

The impact can be reduced or eliminated by using a so-called recontribution strategy, but this is only an option when you are able both to access your super and also make contributions.

Another risk on death is the possibility that any unrealised capital gains on assets backing a pension might be hit by an effective 10% capital gains tax if there is no surviving beneficiary eligible to receive the pension.

Given the complexity surrounding the de facto death duties that can affect SMSFs, it makes sense to get good advice in dealing with these issues.

Super tip

The tax office has confirmed that it is not necessary for an SMSF to keep open its bank account until the tax office's confirmation of the wind-up has been received.

The bank account can be shut once all expected final liabilities have been settled and any outstanding tax refund has been received and rolled over into another super fund.

As the ATO explains, this final rollover will not trigger the need for another SMSF annual return.

It will be necessary, however, to complete the official rollover form and provide it to the new fund.

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