• Video transcript – Paying an income stream part 2

    Tax concessions are available to self-managed super funds that pay an income stream to members, as long as they comply with the super laws.

    Judy and Kelly have an SMSF that can claim a tax exemption on the income earned from some of its assets. Let's take a look at why that is.

    Judy is eligible to be paid a super income stream. Her income stream meets the payments standards, including the minimum benefit amount required under the super laws.

    Any income from fund assets supporting Judy's income stream are exempt from tax.

    Kelly, on the other hand, is not being paid an income stream so the fund must still pay tax on the income earned on her fund assets.

    So how do Judy and Kelly work out which assets support Judy's income stream?

    They can segregate the fund's assets by keeping Judy's assets separate from Kelly's assets.

    Otherwise they will need to get an actuarial certificate so their tax agent can work out the tax-exempt amount.

    Whether they have segregated or unsegregated assets will also affect how capital gains and losses are treated. So they talk to an SMSF professional for advice.

    When thinking about claiming tax exemptions, Judy and Kelly need to consider a few more things such as:

    • Non-arm's length income – SMSFs cannot claim a tax exemption on income from non-commercial arrangements.
    • Tax deductions – generally an SMSF can only claim a deduction for expenses incurred in earning assessable income.
    • Tax losses – exempt income will impact on whether you can claim the full amount of a tax loss.

    The process can get a little complex, so if you need help you should contact an SMSF professional to help you get it right. And it's best to do this before your fund starts paying an income stream.

    For more SMSF information, take a look at our other videos or visit the ATO website at ato.gov.au

      Last modified: 12 Nov 2015QC 39855