Apportionment of investment earnings & tax across members

1. Apportionment of net income into tax and non taxable
2. Tax Payable on members earnings in the fund
3. Reserving – Net Income not allocated to the Members Account

Generally speaking the net income of the fund is shared (allocated) across the members of the fund based on their percentage of the fund (relative member balance). For example your member balance is 40% of the total net worth of the super fund and the income is $60,000 in the fund, so your share of the net income added to your member balance is $24,000 (40% x $60,000).

However the basis of allocation will depend on the trustee’s assessment of the circumstances of the fund. Other approaches used are using a actuarial certificate percentage or a daily balance formulae (where software is used).

Apportionment of net income into tax and non taxable

After the net income of the super fund has been allocated to your member account, the net income now needs to be allocated against the taxable and non taxable components of the super fund. This is a critical step as tax can be payable where you draw your money out as a lump sum rather than as a pension. So identifying your tax free portion and allocating investment earnings to this portion is critical.

The allocation between the components of taxable and non taxable is determined by the <proportionate rule>. Importantly this proportionate rule operates differently in your super fund when you retire and draw a pension. Before you draw a pension the proportionate rule allocates all the investment earnings to the taxable component and nil (0) to the tax free component. However after you retire and draw a pension, the tax free and taxable proportions are set for the life of the pension, and the proportionate rule operates to allocate investment earnings to both the taxable and non taxable parts.

Luckily before you retire any capital losses first reduce the taxable component, which thereby increases the tax free portion of the fund.

Tax Payable on members earnings in the fund

After the net income of the super fund has been allocated to your member account the next step is to calculate the tax payable/refundable and add or deduct it to your member balance.

If you have retired then your member account would not be subject to tax and would most likely receive a tax refund therefore an addition to your member balance. Of course your pension withdrawals from the fund would reduce your member balance.

Reserving – Net Income not allocated to the Members Account

You can decide to allocate the net income of your superfund, or a part of it, to a reserve and not allocate it to the members account.

Broadly reserving for the large Super funds allowed profits/Net Income of the fund to be allocate to a reserve account in good years so that in years when profits/Net Income of the fund are low or negative, the reserves could be used to boot the members account balance and thus smooth the returns to the member.

There can be many different types of reserves, common ones are investment; contributions; pension; anti-detriment.

Reserves can be added to a members accumulation interest account or a pension account. Pensions cannot be added to by contributions, however reserves are not considered to be ‘contributions’ for superannuation purposes (SISR Reg 1.03). The Total Reserves balance should not be excessive, 15% is considered accepted by industry (SCR1999/1. However Reserves are treated as concessional contributions for tax purposes, unless one of the two following specific exceptions are satisfied:

• 5% test – the amount allocated is less than 5% of the members balance at the time of allocation and the allocation from the reserve is made in an fair and reasonable manner taking into account other members of the fund of the same ‘class of member’; and
• Pension Reserve – generally maintained for a defined benefit pension but can support an ABP. The amount allocated from the pension reserve must (1) be allocated allocated soley for the purpose of enabling the fund to pay its liabilities (pension entitlements) as soon as they come due. A conservative approach to interpreting this would be to allocate the reserve to a pension interest (not an accumulation interest) to satisfy the ‘soley for the purpose’ test; and (2) upon death of the member the amount is paid as a lump sum and as a death benefit as soon as practicable.

However reserving for SMSF purposes can be used in a number of strategies. To read more about these strategies <click here>.