In this guide
When you have your retirement benefits accumulating in a super fund, you pay the same rate of tax whether it’s an SMSF or a regular public offer fund.
But there are some important differences between the two types of super fund when it comes to how their tax liabilities can be managed.
To help you understand how SMSFs and large super funds deal with their tax liabilities, SuperGuide has put together a simple explainer of the key differences.
Note that this guide considers only taxed super funds, not the more uncommon untaxed funds relevant for certain government employees and constitutionally protected funds.
Large fund or SMSF: Which is best for tax?
Although the super system itself is a concessionally taxed environment in which to save for your retirement, many people are still keen to take advantage of any opportunity to cut their tax bill.
For tax purposes, super savings within an SMSF are treated the same way as if they were held by a large super fund, but SMSFs have more flexibility in how they can use the tax rules to achieve greater tax efficiency.
SMSFs offer trustees opportunities for more control over the tax position of their fund because there are some tax strategies large super funds choose not to use. These are often impractical to implement in a large fund or using them would benefit some members while disadvantaging others. They often require extensive and expensive system changes that are impractical in a fund with millions of members.
SMSF trustees, on the other hand, can be more flexible and choose to minimise the overall amount of tax their members pay within the fund by making these types of strategic decisions.
Before rushing out to start your own SMSF, however, remember the golden rule of investing – never make an investment decision based purely on potential tax savings.
SMSFs offer tax management benefits, but for some people, it’s questionable whether they are worth the administrative burden of running their own SMSF. And remember, the Australian Taxation Office (ATO) is the regulator for SMSFs and will always be looking over your shoulder. (Mainstream funds are regulated by the Australian Prudential Regulation Authority, APRA)
Need to know
Franking credits represent tax a company has already paid in Australia on any profits it distributes to shareholders by way of dividends.
Shareholders can then use these franking credits, also known as imputation credits, to offset their tax liability on other income at the end of the financial year. People who pay no tax, notably SMSF investors in retirement phase, can claim a full tax refund from the ATO.
Franking credits are designed to avoid profits being taxed twice – once in the hands of the company and once in the hands of the investor.
For more information read SuperGuide article: The definitive SMSF guide to franked dividends.
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