Every Superannuation members balance is separated into various components. The main two that we are focusing on in this article are taxable and tax free. If you have a members statement handy, you will typically see the amount above your total members balance. There are other components like preserved and unrestricted non preserved, but we will leave that to another day. Your members statement may even have a taxable or tax free percentage.
Many people misunderstand the affect that these two components have on your Superannuation balance. A high taxable component percentage will not affect your tax payable each year. All SMSFs that do not have any pensions will pay 15% tax on net income each year regardless of the taxable and tax free components of the members.
The taxable and tax free components are a historical record of all the concessional and non-concessional contributions made by you to your Superannuation. Concessional contributions are the ones your employer paid on your behalf. Non concessional contributions are after tax contributions made after marginal tax rates were applied.
Supervision SMSF keeps these records in accordance with the legal requirement to do so. We do have customers coming from other accountants that do not possess this information and we find that quite scary.
The reason that these components are recorded and kept for your lifetime is because any death benefits or pension payments taken before 60 years of age will be taxable to the person that receives them. Income taken from Superannuation under the above scenario will be added to the personal returns of the person receiving the money.
This is when the taxable and tax free amounts kick in. If you were to receive a $100,000 death benefit from your Uncle (and you were not a financial dependant of him) and the taxable percentage of that death benefit was 70%, $70,000 would be added to your personal income in that year. As happy as you might be about receiving the $100,000, $70,000 income may push you over tax thresholds which mean a lot of tax to be paid. Of course the ATO will not double tax you on contributions tax already paid but you may still have a tax headache.
This headache may be one which you leave your non dependent children if you are not careful. There are ways in which you can mitigate this problem but steady long term planning is required and professional advisers are required. If you want to know more about how to deal with this problem, please don’t hesitate to contact Supervision SMSF on 08 9367 9655 or contact your financial adviser who has probably been telling you about this for quite some time.
Please be on the look out for another in our exciting accelerate series.
