SMSFs don't get a free tax ride, experts say

Self-managed superannuation fund experts have hit back at claims SMSFs are getting a tax-free ride through franking credits and tax exemptions, saying these tax minimising tools are available to all super funds.

As reported by Fairfax, statistics from the Australian Tax Office show almost 300,000 SMSFs were able to eliminate or minimise tax on their super and net $2.5 billion in franking credits in 2011-12.

In that year, 424,360 self-managed funds generated gross taxable income of $32.9 billion, but $15 billion of that was entirely exempt from income tax because the funds were in the pension phase, according to Fairfax.

But two SMSF experts have said those claims are largely sensationalised and trustees were working within tax rules that have been in place for a long time.

“This is nothing new,” says Kathy Evans, principal of superannuation and SMSF at Crowe Horwath.

“[SMSF trustees] are just working with rules, and they are no different to other structures that help taxpayers minimise their tax.”

Because SMSFs invest in shares, they are credited the tax paid by the companies they invest in the form of franking credits. They are essentially subsidised on their 30% tax rate by the company, because otherwise the ATO would receive two lots of tax on the same investment.

But Graeme Colley, director of technical and professional standards at the SMSF Professionals’ Association of Australia, says most of the large super funds also invest in shares and are also entitled to these franking credits.

“If you a shareholder – it doesn’t matter who you are… you are entitled to them,” says Colley.

Colley says there are no further tax exemptions offered to SMSFs that are not also offered to other super funds.

“There are no words in the legislation that say, ‘this is how SMSFs get taxed and this is how the big funds get taxed’. They’re all taxpayers,” he says.

Evans says these tax rules have been in place since the 1990s and SMSF trustees are just working within the rules to get the most of out their retirement funds.

She says suggestions SMSFs are purely for the wealthy are inaccurate, and she sees many trustees who could not be classified in that category.

“These people have worked hard all their life, they’ve paid their tax and have got plans in place to assist with their retirement. They are working within the legislation,” says Evans.

Both Colley and Evans say calls to get rid of franking credits or to change the dividend imputation system of taxation should be viewed with caution.

“It may become a disincentive. If they mess with the rules, people will lose interest and I don’t think that’s a good thing,” says Evans.

“We need more people saving for their retirement.”

Colley says if you change legislation for SMSFs, then it will need to be reconsidered across the board.

“Picking on one set of taxpayers is unfair,” he says.

This article first appeared on SmartCompany.