The value of imputation credits in a SMSF
- by David Hasib

One of the great benefits of SMSFs is investment choice & control. Further to this is the concept of taxation control, where the trustees make specific investment decisions with due regard to the taxation outcome of those decisions.

Possibly the most important and powerful tax tool for trustees is the use of imputation credits received predominantly from direct investment in Australian shares, or to a lesser extent through managed funds. Imputation credits can be used to offset the tax payable on the taxable income of the fund.

Taxable income includes investment income, taxable contributions, and taxable capital gains. Further to this, if the imputation credits of the fund offset all of the taxable income of the fund and there is excess left over, these can be claimed as a refund.

The key issue around imputation credits is the fact that the income tax rate for super funds is only 15%, while imputation credits from fully franked dividends can be as high as 30% of the gross dividend. This means that the imputation credit easily accounts for the tax payable on the dividend received, and leaves a significant excess to be used to reduce the other tax payable by the fund.

How does it work in practice ?

The application of franked dividends is the same for SMSFs as it is for an individual. That is, the dividend received is “grossed up” by the amount of the imputation credit to achieve a grossed up dividend. It is on this amount that tax is then assessed at 15%. The fund is then entitled to a tax offset for the imputation credit.

Example: consider the simple example below where the SMSF only holds NAB shares and CBA shares:

 In this example, not only will the fund pay no tax on the dividend income of these two shareholdings, but it will have $315 of excess imputation credits to use to offset against other tax liabilities of the fund (such as other income, capital gains, and taxable contributions). If none exists, then the fund can receive a refund of this amount.

An important point to note. To actually receive the tax benefits of fully franked shares, the fund needs to ensure that they hold the shares ‘at risk’ for at least 45 days. Where the shares are preference shares, the rule is extended to 90 days. This is an important consideration for those funds that trade shares regularly.    

 Insurance

Most people think of superannuation as a vehicle for funding their retirement benefits. Whilst this is true, the other key purpose of super that is often overlooked is the provision of financial benefits to your dependants in the event of your death, or benefits to you and your dependants in the event of your disability. Remember, death and disability are also "conditions of release" for your SMSF account.

This is a very important issue for your SMSF, and forms a vital part of your estate planning. In a nutshell, this is all about "looking after your family" if misfortune strikes. Don't assume it can't or won't happen to you.........it can and does to many people, and by it's very nature, it's almost always unexpected.

 The three main events that SMSF trustees need to consider are:

- Death

- Total and permanent disability 

- Temporary disability

Now, paying out death or disability benefits from your SMSF have to be funded somehow. There are basically three different ways to fund payouts for the above events. Your account balance, an insurance policy from an insurance company, or self insure within the fund via a self insurance reserve.

 Why insure within your SMSF ?

There are two main reasons why individuals will obtain some or all of their insurance covers from within a super fund rather than outside of super: 

- the premiums are tax deductable to the super fund. Note that Life and TPD insurance is not tax deductable outside of super, whilst income protection is.

- the premiums are paid for by the super fund, rather than the member having to pay for them out of their other monies.

Tax rate table of SMSF lump sum and pension payments

The following summarises the tax treatment of taking either a lump sum, or a pension (including disability payments) from your SMSF based on your age.

Tax free component

The tax free component of all benefits taken, as the name suggests, is tax free.

 Taxable component

The taxable component of any benefit taken from your SMSF is taxed in the following way:

 *Note that this assumes that none of the taxable component of your SMSF benefits are what is known as an "untaxed element".  

Untaxed elements tend to only arise when the SMSF receives a payout from life insurance. These are relevant for Death benefit payout's.

Need more information?  

To unlock more information about investing for children, contact Chan & Naylor Financial Planning

http://www.chan-naylor.com.au/financial-planning/

Important notice and general advice warning:

This communication has been issued by Chan & Naylor Financial Planning which is a corporate authorised representative of PATRON Financial Advice, AFSL No.307379.  This information is of a general nature only and is not intended to represent investment or professional advice. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A Product Disclosure Statement (PDS) for the products mentioned in this communication should also be obtained and you should consider the PDS in deciding whether to acquire, or to continue to hold, any investment. 

The information contained in this document is given in good faith and is believed to be correct at the time of publication, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omission (including responsibility to any person by reason of negligence) is accepted by Chan & Naylor Financial Planning, its officers, employees, directors and agents.