Australian SMSF member contributions

Self managed super funds in Australia are taxes at 15%. The Australian tax office considers membership contributions as SMSF income and also tax it 15%. In contrast rollover between Superannuation funds are generally not further taxed (as the prior fund in most cases has already paid that tax).

Australian self managed Superannuation funds can have a maximum of 4 (or maybe 6) members, so are relatively small. They do file BAS returns, and can make a profit (taxed at 15%). So are essentially a company with extra restrictions.

Setting the SMSF as a Manager business is clearly appropriate but how is members equity / benefit best handled in Manager?

As described above Capital accounts appear well suited to this task.
A custom tax code is easily created
However when a Member contribution is made, no tax is taken out (ie changing from the shown tax code to no tax code makes no visible difference). I assume because the Capital Accounts/Members benefits are Balance Sheet not Profit & loss statement accounts.

What is the recommended way of addressing this? I could:

  • Explicitly allocate 15% the contribution to another account such as a tax expense account with a 100% tax code,
  • or a Member contribution -> Tax Payable sub account then do a journal entry to transfer the liability to the Tax payable liability account

Alternatively the contribution could be explicitly treated as income in Manager

That would address the SMSF tax liability of the contribution but I suspect that means I loose the Capital accounts management functionality, or am I missing something here

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Fund members are meant to be created under Capital Accounts tab but do not create 15% tax code. Tax codes are for GST/VAT/Sales tax.

15% tax on contributions should be treated the same as corporation tax. You calculate tax payable on the year-end totals and do single journal entry once a year.

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Thanks Lubos. No using a 15% Super tax code eliminates one path.
I’m not sure I have got there yet though.

Actually I would prefer to track the member contributions in SMSF units. I’m not sure how well this can be implemented in Manager. The idea is I use Managers multi-currency support to track member contributions and unit prices.

  • Use a second currency for Super fund units (either an otherwise unused currency or a custom currency).
  • Set the currency conversion rate (unit price) = (Business nett present value)/(units issued). Updated whenever a revaluation is done.
  • Hold member contributions in these units (pseudo currency) not Australian dollars

To illustrate what I’m trying to achieve a example probably helps.

  • Member 1 contributes $11,765 resulting in SMSF tax liability $1,765 and leaving $10,000 for the SMSF to invest.
  • Member 1 roll over $100,000 result in no additional SMSF tax liability and leaving all of the $100,000 for the SMSF to invest
  • Member 2 contributes $23,529 resulting in a SMSF tax liability of $3,529 and leaving $20,000 for the SMSF to invest.
  • Member 2 rolls over $90,000 resulting in no additional tax liability for the SMSF and leaving all of the $100,000 for the SMSF to invest.

At this time the SMSF has a:

  • tax liability of $5,294 ($1,765 + $3,529)
  • net present value of $220,000 ($10,000 + $100,000 + $20,000 + $90,000)
  • Member 1 nett contribution of $110,000 ($10,000 + $100,000)
  • Member 2 nett contribution of $110,000 ($20,000 + $90,000)

SMSF then buys an investment, incurs costs and makes a profit on the investments. These can be treated as usual in Manager. To keep things simple the SMSF could:

  • Buy a property for $200,000 (entered as an asset in Manager).
  • Investment incurs costs of $5,000. Property is leased for $15,000 pa nett.
  • Resulting in an investment nett profit of $10,000 ($15,000 - $5,000) and additional tax liability of $1,500

At the end of the year the SMSF needs to show

  • $11,765 Contribution Member 1
  • $23,529 Contribution Member 2
  • $15,000 Investments
  • $50,294 Total

Costs $5,000

So at the end of the year
Gross profit $45,294 ($50,294 - $5,000) Reported Australian tax office
SMSF tax $6794 (15% of $45,294 or $1,765 + $3,529 + $1,500)
Nett profit $38,500
Nett profit $8,500 excluding member contributions
Members nett contribution remains unchanged

  • 110,000 (units) Member 1
  • 110,000 (units) Member 2
    However SMSF nett present value is now $228,500 ($8,500 + $220,000)
    So conversion rate SMSF to $A is 1.0386 ($228,500 / $220,000)

In 5 years time assuming the SMSF lease continues to nett $15,000 pa with no other investments, asset appreciation or costs then:

  • A further after tax profit of $63,750 (5 x $15,000 - 15% tax) would be added Resulting in a nett present value $292,250 (63,750 + $228,500).
  • Member nett contributions unchanged so unit conversion price is 1.3284 ($292,250 / $220,000)

In summary documenting this in Manager requires

  • Members contributions to result in a SMSF taxable income. Member contribution recorded reduced by SMSF tax liability. SMSF nett value increase by Member contribution post tax. Perhaps this means it needs to be posted to an income account ie Profit & loss account.
  • Members roll over result in no SMSF tax liability. Full value of roll over added to member investment. SMSF nett value increased by full value of roll over. Perhaps this means it needs to be posted to the balance sheet side.
  • Ratio of SMSF_nett_present_value / Total_member_after_tax_contributions used to convert between prior member contributions and any new contributions or withdrawals. Perhaps this could be achieved by recording Members contributions in capital accounts in SMSF units not Australian dollars.
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I have worked it out & will post details later to simplify the process for others setting up an Australian SMSF. A brief summary is:

  • Member concessional contributions need to be posted to a (dedicated) income account then use a journal entry to distribute the 15% tax to Tax payable and remaining earnings to the specific members capital account.

  • Non concessional contributions and roll overs are posted directly to the members capital account (as no additional tax liability).

  • Retained earnings are posted by journal entry 15% to Tax payable, the remain 85% in proportion to members capital account. This is done at least yearly. More often if required (member balance significantly changes).

  • Capital sub-account at least for concessional & non - concessional contributions. Further sub-accounts such as “Drawings” & “Share of profit” can be used if other reporting or distributions done by other party (eg accountant).

Super fund unit price maintenance removes the need to do member distributions to all members prior to any member making a contribution or drawing. The functionality is beyond current Manager capabilities but with small SMSF and infrequent or minor Member account ratio changes, manual intermittent earning distribution is workable.

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In detail.
Chart of account needs

  • Members concessional contribution income account
  • Income tax liability account
  • Renaming other accounts clarifies current function

    Capital sub accounts. The latter 2 are not strictly required.

Members (people) in the Super fund are added

Member 1 Concessional contribution in detail
Initial summary

Bank account entry

Resultant change in summary

All these retained earning were contributed by Member 1 so second part of Member 1 concessional contribution is journal entry distributing all profit after SMSF tax to Member 1

Summary after both parts shows concessional contribution is treated as SMSF income, and after tax contribution added to Member 1

Roll over (into SMSF) and Non concessional contributions
Are after tax so no additional tax is taken out. As such it is not treated as super fund income and can be directly added to the Member (capital) accounts. The component which is Non concessional must be separately accounted for (specified in the roll over documentation from the other fund).
This can all be done directly by a Receipt

The resultant Summary

Repeating the above for Member 2

  • Adding in running business for a year with
  • Buying real estate $200,000 plus GST
  • Costs $5,000 plus GST
  • Lease payments $15,000 plus GST

Result in summary

Distribution of profit
This need to be done at least yearly for reporting to Members.
It should also be done prior to and change in members equity ratio to ensure subsequent profits/loss are distributed in accordance with the new equity ratio.
A member with a low balance and regular payments may also trigger a need for early distribution if the super fund is loosing money at that time (to prevent a member having negative balance after loss distribution).

Actual distribution is done by a journal entry. Distributes retained earnings after tax in proportion to members equity ratio (in this case 50%)

Summary after distribution of profit

Manager Reports

Capital accounts summary

Statement of changes is equity
Not the order of items is alphabetical so relies on item naming not grouping by member.

Drill down from the summary page on Members Equity shows Equity transactions for a particular member

For example Member 1

Similar information is available when drilling down from the Capital Accounts tab, for example Member 1

A report showing date and Sub account for all member can be produced via Custom reports

The Custom report definition (edit screen) for which was

I do not believe Manager currently supports (or at least I couldn’t find how to):

  • Group custom report by individual member.
  • Capital account drill down showing sub account balances
  • Similarly showing Equity ratio variations over time probably also requires a custom theme (knowledge of which is required when calculating Member share of profit / identifying time points for which asset valuation is required).

All journal entries above put 15% in the “Tax income liability” account.
An equivalent way of doing this by using a tax code such as

The tax can then be taken out during the distribution of profit just by applying the tax code

Instead of

Similarly when adding a members concessional contribution

instead of

I will add illustrations of integration of the tax reporting later

Great work @Patch - thank you