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What are the tax benefits of a SMSF?

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I have heard that using a self-managed super fund (SMSF) you could actually not pay tax on your investments but even pocket a tax refund. How does that work?

Yes, some people do design their investments so they get that outcome but I always say be very wary about doing something purely for taxation purposes. Let me explain how a SMSF is taxed and then show how some people do get a tax refund. A SMSF is taxed like an individual but there are different tax rates.

Let me sum up how a fund is taxed. First, all assessable income is taken into account where dividend and interest income are the typical sources for a SMSF. The total allowable deductions are added up and these will include fees for accounting, administrator, financial planning advice, brokerage, legal expenses, etc.

Then you deduct the deductions from the assessable or taxable income and you then work out 15 per cent of that figure as super funds are taxed at that rate. But it is not over yet — next you deduct from this tax payable amount any tax credits from things such as imputation credits and possible foreign tax credits. Why do they do this? Well, you have already indirectly paid the tax through the public company that has paid its 30 per cent tax bill. So if they taxed you again on your dividends then you would be double-taxed.

And so this is where some people can create a tax refund by only buying shares in their SMSF which are fully franked. This means the company has paid 30 per cent on their profit and if your tax rate is less than that then you are effectively refunded the difference you have overpaid. Clearly when the credits are greater than the tax payable then it is refund time.

The tax on a super fund can be tricky as there are a host of rules and so I recommend you make sure your accountant is very comfortable with SMSFs and it could be smart to get some financial planner’s advice from the start so you can maximise the information you need to do a great job managing your own money.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Tuesday, August 09, 2011

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