Distribution of earnings & tax to members in SMSF (both pension & accum)

Hi there, can anyone please clarify for me ..... as I feel like I am second guessing my new accountant (each accountant seems to do things differently), very confusing......

Our SMSF has 4 members, two members with both a pension and accumulation account and two members with just accumulation accounts

We use an actuary to calc % of income that is tax exempt etc.

On my tax return/financials it seems that the before tax income (less Franking credits) is distributed on the actuary % basis to all members accounts (pension and accum), and then likewise the tax refund (fr cr less tax owed) is distributed on the actuary % basis.

I would have thought that the BEFORE tax income (incl franking credits) is distributed to all members accounts (pension and accum) using actuary %, and then separately the tax liability is then distributed across members accounts in accumulation ONLY (using prorata basis of members actuary % as a % of all accumulation account %’s)

I cannot fathom why the distributions to the pension accounts are using the actuary % on earnings net of tax when they are tax exempt.....

Thanks

 

welcome to InvestChat , Sue ,

this is way outside my range of skills , so i will only ask extra questions so a skilled member can assit you better

from what you are saying , i get the feeling that the assets are in joint names ( aka 'the trust ' )
where proceeds and assets are shared equally but NOT the tax implications )

if that is the case my uneducated opinion would be similar to yours

if not, are there 6 accounts spread among 4 individuals , that might mean each account is assessed individually ( to satisfy the tax implications )

good luck

 

Hi Sue

This is a complex area.

Your accountant should be able to generate a report from their software showing the breakdown upon request. If they can't, they either don't use the right software or they don't know what they're doing (they probably do but most accountants are not good at explaining it).

Typically the income and tax is proportionately allocated to members based on their average member balance. Tax on contributions are separate.

Where there are franking credits, these offset all tax at a fund level (from both fund income and contributions) - i.e. the contributions tax from accumulation members can eat up the franking credits from tax exempt pension members.

Depending on the member balances (i.e. if no pension member has $1.6m or more) then segregation (for tax purposes) is an option - it's a pain to set up correctly, but once in place with an accountant who knows how to correct manage it, it works a lot better. The pension and accumulation members should each have their own accounts / investments / investment strategies and when the tax is calculated, each member either makes their payment for their own liability or receives their refund. Often this means the accumulation members need to transfer cash from their bank account within the fund to the pension members bank account to effectively pay them for the franking credits they consume to offset their contributions tax to ensure the pension members are not disadvantaged.

Or, if its all family, just trust your accountant and get on with life!

Hope this assists.