Tax & Insurance

SMSF Tax Rates: How Is a Self-Managed Super Fund Taxed?

When it comes to taxes, a self-managed super fund (SMSF) is taxed differently to other types of investments outside of super. Here’s a look at how SMSFs are taxed and what this means for you. An SMSF is a trust structure set up specifically for the purpose of providing retirement benefits for its members. As such, the rules governing how SMSFs are taxed can be quite complex.

At a high level, there are two main components to an SMSF’s tax obligations: contributions to the fund and investment earnings. Let’s take a look at each in more detail. Contributions to an SMSF are generally taxed in one of two ways:

  • Concessional contributions: These are contributions made from before-tax income, such as salary sacrifice arrangements. The tax rate on concessional contributions is 15%.
  • Non-concessional contributions: These are after-tax contributions, such as money from your savings account. The tax rate on non-concessional contributions is 0%.

Investment earnings within an SMSF are generally taxed at a maximum rate of 15%. However, depending on the type of investment, this tax may be paid either by the fund or by its members. For example:

  • Direct investments in shares and property held within an SMSF attract a 15% tax on the income earned. This is paid by the fund and does not impact on its members.
  • Cash investments, such as bank accounts or term deposits held within an SMSF attract a 15% tax on interest earned. This is paid by the individual members of the fund, so it reduces their overall taxable income.

SMSF tax rates – what are they?

An SMSF can provide the trustee(s) of the fund with greater control of the tax within their superannuation, which is a key advantage of having an SMSF. Here we discuss the rules and requirements relating to tax within your SMSF to give you a better understanding of how it works. In comparison to other super funds (industry, retail and corporate superannuation funds) an SMSF is treated the same way with regards to tax. Where the greater control and flexibility of an SMSF comes into play is primarily to do with the trustee’s ability to decide when assets are sold, which directly relates to when taxes are paid.

Earnings within a super fund are currently taxed at 15%, which includes an SMSF. When income is produced by assets that are solely supporting an income stream like a pension, there is no tax to be paid within the super fund on that income.

According to the ATO, the assessable income for an SMSF includes the following:

  • deductible contributions either from an employer or personal
  • income generated from interest payments, dividends, distributions and rent
  • net capital gains (less total capital losses; and capital gains tax discounts).

What is concessional contributions tax?

Concessional contributions tax is a type of tax that applies to superannuation payments made by or on behalf of an individual, which are treated differently from other types of income. This means they receive a concessional rate of taxation, usually around 15%.

Concessional contributions tax was introduced to help encourage individuals to put money into their superannuation fund. There are a number of different types of contributions that can qualify for concessional tax treatment, including employer contributions and personal contributions that you make out of your pre-tax income.

Most superannuation funds will calculate the amount of concessional contributions tax you owe based on the total amount that you have contributed to your superannuation account during the financial year. However, some funds may use a different method to calculate this tax. If you make concessional contributions and you are a high-income earner, you may be liable for an additional tax called the Division 293 tax. This tax is payable on amounts above a certain threshold and is calculated at a rate of 15%.

While concessional contributions tax is important to understand, it is just one part of the overall taxation of your superannuation. You may also be liable for other taxes on your superannuation, including capital gains tax and income tax on benefits you receive when you retire or leave your job. To learn more about these types of taxes and how they may apply to you, speak to a qualified financial advisor.

What are non-concessional contributions and how are they taxed?

A non-concessional contribution is a voluntary superannuation payment that isn’t restricted by the government. These types of contributions don’t usually receive any tax breaks and are also limited to $100,000 per year. Because non-concessional contributions aren’t subject to the concessional contributions limit, they may be useful if you’re planning to make large contributions to your superannuation.

Non-concessional contributions are subject to a tax on the earnings they generate while they are in the super fund. This is known as non-concessional contributions tax and generally sits at around 15%. However, this rate may change depending on the super fund in question.

One of the main benefits of making non-concessional contributions to your superannuation is that you’re not restricted by the annual concessional contributions limit, which means it can be a great way to boost your retirement savings over time. However, it’s important to be aware that these types of contributions are subject to tax, so it’s important to speak to your accountant or financial advisor before making any non-concessional contributions to your superannuation.

What is excess non-concessional contributions tax?

There are certainly limits to how much you can contribute to your SMSF as a non-concessional contribution. If the non-concessional cap is exceeded, the ATO will get in touch with you after the lodgement of your annual tax return, and they will politely ask how you wish to be taxed on the excess non-concessional contributions.

The first option is to release the excess contribution amounts from your SMSF. By doing so, you are choosing to withdraw all the excess non-concessional contribution amounts and 85% of any earnings derived from these contributions. In this instance, any non-concessional contributions will not be subject to the excess non-concessional contributions tax. However, the earnings derived from these contributions will be added to your assessable income and taxed at your marginal tax rate (subject to a 15% tax offset). Typically, the ATO will send you a release form, and you will have ten working days to action the release of funds.

The second option is where you will pay the excess non-concessional contributions tax on the excess amount. This will occur when you choose not to release the contributions from your SMSF and these excess contributions over and above the limit will incur an excess contributions tax at the highest marginal tax rate (currently 47%). For this reason, it’s critically important that you keep track of all non-concessional contributions and do not exceed the limits.

Super withdrawals – how are they taxed?

When you retire, you have a few options for how to access your super. The amount of tax you pay comes down to if you withdraw your super as a lump-sum withdrawal or receive it as a super income stream. It’s always worth considering professional advice prior to withdrawing funds from super. Discussing your personal circumstances with a financial adviser can help you make an informed decision with regard to any superannuation income stream or lump sum withdrawals to ensure they are tax effective. A financial planner will consider your personal circumstances whereas any information on our website has a general nature.

Super income stream

Income streams are taxed differently. The tax-free component is not taxed, and the taxable component is taxed at your marginal tax rate (plus a 2% ‘deficit repair levy’ if your taxable income is over $180,000). So, for example, if you have an income stream with a tax-free component of $50,000 and a taxable component of $150,000, the first $50,000 will not be taxed and the remaining $150,000 will be taxed at your marginal tax rate.

Lump-sum withdrawals

If you take a lump-sum payment, the first $185,000 is tax-free. This is known as the ‘low rate threshold’. Anything above this amount is taxed at 15%. So, for example, if you withdraw $200,000 as a lump sum, $15,000 will be taxed at 15%.

 

How to prepare a SMSF tax return / SMSF tax return instructions

Today, more and more people are choosing to invest in self-managed super funds (SMSFs) as a way to grow their wealth over the long term. And while there are many benefits to this type of investment, one critical aspect to keep in mind is preparing your SMSF tax return each year.

When it comes to preparing your SMSF tax return, there are a few key things to keep in mind. Here are some important tips to help you get started:

  1. Make sure you have all the necessary documents and information on hand. This includes your SMSF annual report, financial statements, member contribution statements and any other relevant documents.
  2. Familiarize yourself with the rules and regulations surrounding SMSF tax returns, including any specific requirements or guidelines set out by your financial institution or government authorities. Not doing so can result in penalties, fines, and other legal consequences.
  3. Be sure to double-check all of your numbers and calculations before submitting your return. This will help to avoid any mistakes or errors that could delay the processing of your tax refund or result in additional fees.
  4. If you have any questions or need assistance, don’t hesitate to reach out to a qualified accountant or financial advisor. They can offer valuable insights and guidance throughout the process.

With these tips in mind, you can prepare a thorough and accurate SMSF tax return that will help minimise any potential issues or delays.

When are SMSF tax returns due?

SMSFs are required to submit their annual tax returns by a certain date. This is usually the same date as to when the financial accounts for the SMSF need to be approved, and it is based on the typical financial year of July 1st to June 30th.

If your SMSF is part of a corporate trustee structure, then all members must also sign off on your income tax return before it can be submitted. In this case, you may receive two notices – one from the ATO regarding your income tax return and another one with regards to your corporation’s tax return.

For more information about how to complete an SMSF tax return, or if you have any questions about sending in your forms, speak with an accountant or financial advisor. They will be able to help you determine the best course of action for your SMSF.

What is non-arm’s length income?

Investment transactions within the SMSF, whether it be buying or selling must always be made on what’s called an arm’s length basis. This practice is to ensure that any investment decisions are conducted at fair market value on an independent and commercial basis which includes things like asset purchases, asset sales, returns on investments, and loan arrangements.

There are some strict rules around what’s called ‘related parties’ with regards to the arm’s length investing requirements which extend beyond immediate family or relatives to the SMSF trustee and include people like business partners, any child or spouse of those business partners, companies or trusts which are controlled or influenced by the members of the SMSF.

If it is deemed that an asset is sold to a related party at below market value, the transaction would be in breach of the arm’s length investment rule. In this example, the income received from this transaction would be deemed non-arm’s length income. It would be taxed at the highest marginal rate instead of the usual concessional superannuation rate of 15%.

Contributions to your super fund are generally taxed at the concessional 15% rate unless the contribution is considered non-concessional (after-tax). A non-concessional contribution does not incur tax when it enters the super fund as tax has already been paid. However, there are limits to consider and the amount of tax payable depends on your income and the type of contribution it is deemed to be.

In-house assets

In a self-managed super fund (SMSF), in-house assets are those investments that are held by the SMSF itself, rather than being held through an external provider such as a managed fund.

In-house assets can include:

  • Directly held shares
  • Property held by the SMSF (either commercial or residential)
  • Cash and term deposits
  • Collectables and personal use assets (such as artworks or jewellery)

If the fund holds these assets, the SMSF must comply with the strict rules and regulations around in-house assets set out by the ATO. These rules are designed to ensure that SMSFs do not put their members’ retirement savings at risk by holding too many in-house assets.

If the SMSF holds an in-house asset, it must be properly managed and valued to ensure that it is not overvalued or undervalued. In addition, the SMSF must also keep careful records of all transactions relating to in-house assets, as these will need to be reported on the fund’s annual tax return.

In order to minimise any risk associated with holding in-house assets, SMSFs should seek expert advice from qualified professionals who can help them manage their investments successfully. This may include engaging a professional financial advisor or accountant who can provide tailored recommendations for your specific circumstances and goals.

Given the complexities of holding in-house assets and complying with the rules and regulations around this type of investment, it is important to ensure that you have the right advice and support to help you manage this asset effectively. With the right management, in-house assets can be a valuable part of your overall investment strategy and help meet your retirement savings goals over the long term.

As always, if you need any assistance with managing in-house assets or want advice on choosing the investments that will best suit your needs, don’t hesitate to get in touch with a financial advisor. They can help guide your decisions about where to invest and provide expert guidance for managing your SMSF’s investments proactively and securely.

Avoiding tax penalties – keeping your SMSF compliant

One of the main reasons that SMSFs often fall afoul of the ATO is because they fail to keep up-to-date records. This means that if an audit does occur, it will be more difficult for them to track down where any mistakes or irregularities have occurred. Generally speaking, you should aim to keep all documentation related to your SMSF for at least seven years – this includes things like bank statements, transaction forms, payment summaries (group certificates), and any other relevant paperwork.

Another way to avoid tax penalties is by ensuring that you make all contributions and withdrawals from your SMSF in accordance with the law. For example, you can only make personal contributions if you meet certain conditions, such as being under age 65 or having met the work test (if you’re over 65). Similarly, there are rules around when you can withdraw money from your SMSF – generally speaking, you can’t access your super until you reach preservation age (between 55 and 60, depending on when you were born) and then retire.

If you’re unsure about any of the rules surrounding SMSFs, it’s always best to seek professional advice before taking any action. This will help ensure that you stay compliant and avoid any penalties, so you can continue enjoying the benefits of having an SMSF for many years to come.

With these tips in mind, you’re well on your way to keeping your SMSF compliant and avoiding any tax penalties.

 

General Advice Warning

Kind words from Aussies managing
their own self funded futures

  • SMSF Mate is a unique website because it has ideas about how to approach SMSFs, insurance and other financial topics that come straight from first hand experience. It's much more useful than what you find on all the other financial websites that just offer generic info that you could easily get on the ATO's website. It's also nice to know there's no financial incentive behind the information, it's legitimately there to help people understand self-managed super funds and how to get the most out of them, not to get an affiliate commission from a broker or other financial services provider. The investment product information is also incredibly useful, I've never seen this kind of functionality on any other website that let's you look at such a wide range of products, sort by what info is most interesting or important to you, and subscribe to updates for different funds and financial products all in one place. Definitely worth checking out if you own or are considering an SMSF!

    David G, Self-Employed, SMSF Owner
  • SMSF Mate provides a unique insight into superannuation and financial topics in a way that is easier to understand than conventional websites. The colloquial nature of the site makes it easy to understand and they often speak about complicated topics in lamens terms so I can wrap my head around them. The investment product information is a great way to research funds that I am interested in investing in with my SMSF and there is a lot of helpful information on the site for better structuring my investment portfolio. In comparison to other websites which offer similar information, SMSF Mate excels as the information is free to access whereas many other sites charge a subscription fee for the same thing. Overall, I think SMSF Mate is a great resource for SMSF trustees and is worth looking at for a variety of super-related topics. Thanks.

    Tim B, Business Owner, SMSF Trustee