The addition of withdrawals from superannuation back into the formula used to calculate the proposed Division 296 tax is causing confusion and its role in calculating earnings compared to the proportion of earnings needs to be separated, an SMSF administrator has noted.
Heffron managing director Meg Heffron said the confusion around the treatment of withdrawals had led some people to think they were being taxed on those sums or there was no point in taking such action because the amounts were added back into the formula.
“Adding back withdrawals is purely a device to calculate earnings, [not the proportion of earnings]. The all-important thing for somebody who’s taking a lot of money out is the formula,” Heffron said during a practitioner briefing last week.
“It’s 15 per cent times a proportion [of earnings] times earnings. If your proportion is nil, then there is no Division 296 tax to pay,” she stated, adding there were no addbacks when calculating the proportion.
To illustrate this, she provided the case of a couple in an SMSF, Robert and Cora, who both had a balance of $7 million at the start of the financial year and $7.5 million at the end of the year, when Cora decides to withdraw $4 million.
“One of the numbers we have to calculate is earnings and in both cases it’s exactly the same [at $500,000]. That makes sense because they both fundamentally had the same experience when it comes to their investment growth,” she said, noting the large withdrawals did not change this figure.
“Cora has taken a heap of money out and we’ve added that back, but that was just a device to get the right number for earnings for her.
“So her big withdrawal didn’t change her earnings at all. It’s exactly the same as Robert’s.
“It did make a big difference to the proportion of earnings because the proportion ignores everything that’s happened during the year and just looks at the position right at the end of the year.”
In Robert’s case, his proportion was calculated using his end-of-year total super balance (TSB) of $7.5 million minus the $3 million threshold and that sum was then divided by the end-of-year TSB figure to give a proportion of 60 per cent, of which 15 per cent was $45,000, she said.
In contrast, Cora’s proportion was calculated using her end-of-year TSB of $3.5 million minus $3 million divided by the end-of-year TSB figure for a proportion-of-earnings figure of 14.29 per cent, of which 15 per cent was $10,718.
“In her case, she had a lot less money at the end of the year than Robert did, so she pays a lot less Division 296 tax,” Heffron said.
