Tax on income
The income of your SMSF is generally taxed at a concessional rate of 15%. To be entitled to this rate, your fund has to be a ‘complying fund’ that follows the laws and rules for SMSFs. For a non-complying fund the rate is the highest marginal tax rate.
The most common types of assessable income for complying SMSFs are assessable contributions, net capital gains, interest, dividends and rent.
Assessable contributions
Certain contributions received by a complying SMSF are included in its assessable income and are usually taxed as part of the SMSF's income at 15% (or 47% for non-complying SMSFs). These ‘assessable contributions’ include:
- employer contributions (including contributions made under a salary sacrifice arrangement)
- personal contributions that the member has notified you they intend to claim as a tax deduction
- generally any contribution made by anybody other than the member, with limited exceptions such as spouse contributions and government co-contributions.
No-TFN-quoted contributions
If the member has not quoted their TFN, you will have to pay additional tax on their mandated employer contributions and you cannot accept other types of contributions. The additional tax rate is 34% for complying SMSFs and 2% for non-complying SMSFs.
If you pay the additional tax and, at a later stage, your member gives you their TFN, you may be able to claim back the additional tax as a no-TFN tax offset in your SMSF annual return. You can only claim this offset within three years from the end of the financial year that the contributions subject to the additional tax were made.
If you have debited the amount of additional tax from your member’s account and you claim the tax offset in a later year, you need to re-credit this money to their account.
Tax exemptions in the retirement phase
A complying self-managed super fund (SMSF) normally pays tax at the concessional rate of 15%.
An SMSF can receive further tax concessions once it begins paying superannuation income streams (commonly known as pensions) that are in the retirement phase.
Investment income a SMSF receives from its assets is tax exempt to the extent that those assets are supporting retirement phase income streams. This income is called exempt current pension income (ECPI).
You can claim ECPI in your SMSF annual return once your SMSF begins paying one or more retirement phase income streams. However, your SMSF is not automatically entitled to ECPI – there are steps that you must take to be able to claim it.
Capital Gains
Your SMSF’s assessable income includes any net capital gains, unless the asset is a segregated current pension asset. Complying SMSFs are entitled to a capital gains tax (CGT) discount of one-third if the relevant asset had been owned for at least 12 months.
A net capital gain is:
the total capital gain for the year
less
total capital losses for that year and any unapplied capital losses from earlier years
less
the CGT discount and any other concessions.
A capital loss (for example, losses on the sale of commercial premises) is not an allowable deduction and is only able to be offset against capital gains. If capital losses are greater than capital gains in a financial year, they must be carried forward to be offset against future capital gains.
Transitional CGT relief
Transitional CGT relief is temporary relief available to trustees of superannuation funds – including SMSFs – that adjust their asset allocations to comply with the transfer balance cap, and transition-to-retirement income stream (TRIS) reforms that commenced on 1 July 2017.
To prepare for the transfer balance cap reforms, individuals may have needed to reduce amounts currently supporting superannuation income streams. They might have done this by transferring value from the retirement phase to the accumulation phase. Additionally, where individuals have a TRIS that is not in retirement phase, earnings on assets supporting these superannuation income streams became taxable from 1 July 2017.
The relief ensures that for certain assets that were supporting superannuation income streams in retirement phase prior to 1 July 2017, a trustee can still receive a tax exemption on capital gains accrued but not realised.
Applying CGT relief will reset the cost base of an asset to its market value. The market value would be determined under the Valuation guidelines for self-managed super funds on the date the relief applies.
Applying CGT relief will also allow you to defer a capital gain that arises when resetting the cost base for assets where you use the proportionate method.
Non-arm’s length income
SMSFs must transact on an arm's-length basis. The purchase and sale price of fund assets should always reflect the true market value of the asset, and the income from assets held by your fund should always reflect the true market rate of return.
Any non-arm's length income (NALI) is taxed at the highest marginal rate.
Broadly, income is NALI for a complying SMSF if it is:
- derived from a scheme in which the parties weren't dealing with each other at arm's length, and
- more than the SMSF might have been expected to derive if the parties had been dealing with each other at arm's length.
Types of NALI income
Income derived by an SMSF as a beneficiary of a discretionary trust is NALI, as are dividends paid to an SMSF by a private company (unless the dividend is consistent with arm's-length dealing).
Income derived by an SMSF as a beneficiary of a trust through holding a fixed entitlement to the income of the trust will also be NALI where:
- the SMSF acquired the entitlement under a scheme or the income was derived under a scheme in which the parties weren't dealing with each other at arm's length, and
- the income is more than the SMSF would have been expected to derive if the parties had been dealing with each other at arm's length
From 1 July 2018, the definition of NALI was expanded to also include income derived by an SMSF from a scheme in which the parties weren't dealing with each at arm's length where the fund incurred expenses in deriving the income that are less than, including nil expenses, those which the SMSF would otherwise have been expected to incur if the parties were dealing on an arm's-length basis.
The expenses may be of a revenue or capital nature in the same way that NALI may be statutory or ordinary income.
From 1 July 2018 the law was also amended to ensure that income derived by an SMSF in the capacity of beneficiary of a trust through holding a fixed entitlement to the income of the trust will be NALI where:
- the SMSF acquired the entitlement under a scheme or the income was derived under a scheme in which parties weren't dealing with each other at arm's length, and
- the SMSF incurred expenses in acquiring the entitlement or deriving the income that are less than, including nil expenses, what the SMSF would otherwise have been expected to incur if the parties were dealing on an arm's length basis.
Deductions
A complying SMSF is entitled to deduct – from its assessable income – any losses or outgoings that are:
- incurred in gaining or producing assessable income
- necessarily incurred in carrying on a business for the purpose of gaining or producing such income.
Losses and outgoings relating to exempt current pension income are generally not deductible because they are incurred in earning exempt income. If the fund has both accumulation and pension members, the expense may need to be apportioned to determine the amount that the fund can deduct.