Do you pay tax in Self-Managed Super Funds?
Yes. The tax laws relating to a Self-Managed Super Fund (SMSF) and an industry or retail fund are the same except in relation to the Australian Taxation Office (ATO) supervisory levy. An annual levy of $259 is imposed on a SMSF which is used to partly offset the administration cost of the ATO regulatory oversight. Industry and retail funds are subject to regulation by the Australian Prudential Regulation Authority (APRA) and are subject to annual superannuation levies which depend on the type of fund and the size of the fund.
The key benefit of an SMSF is flexibility. Large funds, some with millions of members, must accommodate varied needs, making certain tax strategies too expensive and impractical to implement.
A Self-Managed Super Fund trustee has greater control over when a tax event occurs compared to a large fund. The timing of initiating a pension is crucial in reducing or eliminating capital gains tax when disposing of a property. Selling shares or managed funds on 1st July rather than 30 June can defer or reduce tax if the fund transitions to pension mode on 1st July.
Superannuation Fund Taxes
The following taxes are imposed on SMSFs and large industry and retail super funds. The income of a SMSF or a large fund is concessionally taxed at 15% provided the fund is not ‘non-complying’, subject to non-arm’s length income (NALI) provisions or receives a member excess untaxed rollover amount (rare for a SMSF).
Contributions Tax
Contributions tax of 15% is imposed on employer contributions and member concessional contributions which are claimed as a tax deduction in the member’s personal tax.
Capital Gains Tax
When a super fund sells an asset, such as shares, managed funds or property for more than it costs a capital gain may arise. Tax is paid at 15% which can be reduced to 10% if the asset is held for longer than 12months as a one third discount (different to the individual 50% general CGT discount). Tax may be reduced to nil if all of the fund is in pension mode for all of the year when the asset is sold. A capital loss is quarantined and can be carried forward and offset against a capital gain in the future.
Income Tax
The taxable income of a super fund is calculated after working out its assessable income less exempt pension income less any allowable deductions. A fund in accumulation mode is taxed at 15% and a fund in 100% pension mode is exempt from tax. Tax can be imposed at a rate in between 15% and 0% if in full or part pension mode. The assessable income of a fund includes concessional contributions, net capital gains, interest, rental income, dividend, distribution income and other income.
Franking Credits and Foreign Tax Credits
Franking credits, or imputation credits, are attached to a company. The franking credit is offset against the SMSF’s tax payable. Company tax rates can reach up to 30%, resulting in a significant excess credit for an SMSF. Franking credits can be refunded if the fund has no taxable income, such as cases where the fund is in 100% pension mode. On the other hand, a foreign tax credit arising from foreign tax paid on foreign income, cannot be refunded if a fund is in 100% pension mode and cannot be carried forward.
Tax Exempt Income in Pension Phase
A complying super fund paying a “retirement phase pension” is entitled to a tax exemption on all or part of its investment income. Contributions are not exempt from tax. Income arising from pension assets is tax exempt. If a fund is in 100% pension phase for all of the income year all of its income is tax exempt as the fund is deemed to be fully segregated. Otherwise, when a fund is in both accumulation and pension mode an actuary determines the percentage of the fund’s taxable income which is tax exempt.
Non-Arms’s Length Income Tax
Non-Arm’s length income (NALI) is taxed at 45%. NALI includes all dividends from private companies unless the amount is consistent with two parties dealing with each other at arms length, income from non-fixed trusts i.e. family discretionary trust, income from transactions where the parties are not dealing with each other at arm’s length. NALI also includes fund expenses which are subject to a scheme and the fund pays less than expected or pays nothing for that expense i.e. no interest is paid by a SMSF in relation to a related party borrowing.
Hint– the proposed $3 million tax legislation imposing additional tax on member balances over $3 million has not been passed and the bill now lapses as a federal election has been called. In the recent budget the government did not address the bill which does not mean it will go away. It may be brought back for consideration after the election.
Example – tax in a complying SMSF
Bob’s Family Superannuation Fund Assessable income Allowable expenses Tax refundable
| Bob’s Family Superannuation Fund | |
| Employer contributions | 25,000.00 |
| Rent income | 20,000.00 |
| Gross dividends | 12,000.00 |
| Net capital gains | 12,000.00 |
| Exempt pension income | -11,000.00 |
| Assessable income | 58,000.00 |
| Less: allowable deductions | |
| Accounting fees | 2,625.00 |
| Audit fees | 338.00 |
| Asic annual fee | 47.00 |
| Life insurance | 6,000.00 |
| Rental expenses | 3,900.00 |
| Allowable expenses | 12,910.00 |
| Taxable income | 45,090.00 |
| Tax payable | 6,763.50 |
| Imputation credits | 3,600.00 |
| Tax payable | 3,163.50 |
| Less: Payg instalments | 4,000.00 |
| Tax refundable | -836.50 |
| Actuarial exempt pension % | 25% |
Accounting fees, audit fee ,asic fees and rental expenses were reduced by 25% and life insurance is fully deductible refer to “What expenses can I claim in my SMSF“