SMSF Tax

Navigating SMSF Tax

Navigatin SMSF TaxManaging and adaptability are crucial factors when it comes to taxation in a self-managed superannuation fund. While larger funds are subject to the same tax rules as SMSFs, the latter can achieve more tax benefits by having the flexibility to tailor their strategies. The trustee of a SMSF can strategically capitalise on different tax opportunities.

A Self-Managed Superannuation Fund (SMSF) is liable for different forms of taxes, with the primary one being income tax, covering earnings, capital gains, and contributions. Additionally, taxes such as stamp duty, GST, land tax, PAYG instalments, and withholding tax are applicable. When a member of an SMSF withdraws their superannuation benefits, they are subject to tax on those benefits.

Any decision to establish a SMSF or make investments should not be based solely on tax strategies.  Tax strategies should certainly be part of an overall plan which should be discussed with your SMSF specialist or seek financial advice from a Licensed Financial Adviser.

Taxation Imposed at Three Points in the Life Cycle of a SMSF 

  1. On contributions
  2. Fund level including investment earnings at accumulation (growth phase) and retirement (generally tax free)
  3. Member level on withdrawal of benefits 

Income Tax Rates in a Super Fund (SMSF)

A SMSF in the growth stage, accumulation stage, is taxed at 15%, for complying superannuation funds, on its taxable contributions and earnings. A SMSF in 100% pension phase does not pay tax on earnings and in certain circumstances can obtain a tax refund.

A fund may have multiple member accounts being a mix of accumulation and pensions resulting in a tax rate less than 15% but higher than nil if the fund was in total pension phase.  

In rare circumstances a SMSF can be taxed at 45% on non-arms length income. 

Contact Us

If you’re interested in learning more about navigating SMSF Tax please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

Name(Required)

 

Other Taxes

Similar to any other entity a SMSF is subject to stamp duty on property purchases and possibly land tax if the total landholdings exceed the state’s threshold which differs according to each state. A SMSF can register for GST regardless if it meets the turnover test of $75,000 and must register if it does meet it.  The majority of SMSFs do not register for GST unless they own commercial property as generally there are no GST supplies and GST refunds are usually minor. 

PAYG instalments (PAYGI) are prepaid income tax payments.  The ATO make an estimate of the tax for the current financial year which is based on the fund’s income from the last tax return lodged. If the estimate of tax is greater than 0% and the estimated tax is $500 then the fund will be subject to PAYGI, generally, paid annually or quarterly.  The PAYGI will be paid annually, if the estimated tax is less than $8,000, otherwise SMSF pay PAYGI quarterly.  The SMSF trustee is able to estimate the PAYGI if they believe the fund’s taxable income will be less than the ATO have estimated.

We do not discuss the above taxes in detail as it is beyond the scope of this article.

You should speak to your SMSF specialist or tax agent in relation to options available which best suit the fund’s circumstances.

 Taxation in Accumulation Phase including Super Contributions

During the growth phase of a SMSF life cycle tax is paid at 15% which is an attractive concession especially after comparing it to company tax of 30% or possibly 25% (if their aggregated turnover threshold is less than $50mil.) or an individual’s top marginal tax rate of 45% (excluding medicare).

The SMSF pays tax on taxable income less any franking credits or other tax offsets and any PAYGI paid.

 Understanding tax on investment earnings

A self-managed super fund includes income from SMSF investments such as franked dividends, trust distributions, interest, rent and other assessable income plus concessional contributions and assessable capital gains.  The fund is taxed at 15 % after all tax deductions or credits have been allowed.

Franking credits arising from franked dividends are particularly tax efficient when received by a SMSF.  The underlying credit is usually fully refundable and can offset the fund’s taxable income or otherwise can be refunded.

A new tax has been proposed but has not passed the senate at the time of writing this article and is not law at the moment.  The government want to impose additional tax on earnings of super balances of a member above $3million.  The legislation is proposed to start from the 2026 financial year i.e. from 1 July 2025.  We will discuss this further in a separate article.

Managing concessional contributions for tax efficiency

Concessional contributions can be made by an employer or SMSF members and the amount that can be contributed to a complying fund is subject to an annual cap. A lot of SMSFs are part of a family group and the employer is often a related company.  A net tax saving of $2,750 is available to the family group where a contribution of $27,500 is made.

Contribution Tax Deduction @ 25% SMSF contributions tax @ 15% Net Tax Benefit
$27,500 $6,875 $(4,125) $2,750

Claiming a superannuation personal tax deduction of $27,500 when an individual is on the highest marginal tax rate of 47% (inclusive of medicare) can result in potential tax savings of $8,800.  

The cap for the 2024 financial year is $27,500. Contribution caps are increasing to $30,000 from 1 July 2024.   If your total superannuation balance (essentially the total amount you have in super) is below $500,000 on 30 June 2023 it may be possible to use the carry forward unused concessional (catch up) contribution rules which allow you to increase your contribution cap.

Timing is crucial.

Consider the following:

  • End of year contributions to maximise the cap available – especially if you are entitled to use the carry forward rule.
  • Ensure contributions are topped up and presented in the fund’s bank by 30 June. Contributions transferred electronically by 30 June but not presented in the SMSF bank account until after 30 June will not be counted as a contribution until the following year.
  • Contributions received from other employers or made to other funds to ensure you do not exceed the contribution cap.
  • If claiming a personal tax deduction for superannuation contributions ensure the S290 paperwork has been completed, dated and signed within the required timeframes ie notice from the member to advise the trustee of the superannuation contributions and signed acknowledgement from the trustee                

Navigating tax deductions 

Similar to an individual or a company, tax deductions are available if incurred in earning assessable income. A SMSF can also claim tax deductions for some expenses which come under specific rules including life insurance and total & permanent disability insurance and the ATO supervisory levy. Tax deductions reduce the tax payable.

Generally, tax deductions include accounting and audit fees, bank fees, adviser fees, investment portfolio fees, rental expenses including depreciation, cost of upgrading the governing rules when done in relation to the ongoing operations of the SMSF.  Such costs incurred such as the cost of establishing a SMSF including new trust deed, corporate trustee and adviser fees are capital costs and not tax deductible.

 

Tip – An expense is only required to have been invoiced to claim it as a tax deduction. It is not required to be paid.

Understanding capital gains tax 

The capital gains tax is levied on the disposal of assets such as real estate, stocks, trusts, and other self-managed superannuation fund assets. Assets held for more than 12 months are subject to a 10% tax rate. Assets sold while in the 100% pension phase are not subject to any tax.

Strategies to minimise CGT in SMSF portfolios

A SMSF has the flexibility to control when an asset is sold which can impact on the calculation of capital gains. Where possible deferring the sale of SMSF assets until the fund is in 100% pension mode or the asset is able to be segregated to a pension account can reduce the tax on disposal to nil. If the fund is in partial pension mode then a proportional tax rate will be calculated by an actuary and applied to all of the fund’s earnings. 

Flexibility to choose which parcel of shares the sale of assets is allocated to can significantly impact on the capital gain calculation. Refer to the example below “Exploring Other Types of Super Funds for Tax Purposes” in relation to the sale of BHP shares. 

Consider any quarantined capital losses which can be used to offset capital gains.

Tax on non-arm’s length income (NALI) 

Any income derived by a SMSF that is NALI or as a result of Non-arms’s length expenses (NALE) is taxed at 45%.

The Australian Taxation Office is concerned about schemes whereby an SMSF is used as a tax avoidance mechanism by shifting income from a higher taxing individual or entity to the lower taxing SMSF environment. A scheme is characterised  by parties not dealing with each other at arm’s length and the SMSF receives more income than otherwise might have been expected. 

The NALI rules were expanded to include expenses, subject to a scheme, which are less than would be expected, or even nil in relation to gaining or producing income between parties not dealing with each other on an arms-length basis.

Example – A commercial property is purchased for $560,000 which is well below the market value of $910,000 from a member of the SMSF. The rental income is NALI as well as the capital gain when it is sold. The rental income and the capital gains are taxed at 45%. There is a direct link between the cost of the property and the income derived.

The NALI and NALE rules are complex and any transactions which are not at arm’s length should be reviewed carefully to ensure compliance with the superannuation laws. 

Retirement Phase  

Retirees can take advantage of tax savings by receiving super benefits in the form of a retirement phase pension, which is tax-free for members over 60. This offer trustees a chance to lower taxes within the fund.

A retirement income stream (retirement phase pension) is the transfer of a member’s accumulation fund, or part thereof, to pension after a trigger event such as turning 65 or if under 65 the member has reached 60 (preservation age from 1 July 2024) and retired. The pension is required to be reported for transfer balance cap purposes which is the maximum amount a member can have in pension mode.   

The SMSF does not pay tax on the total income earned from fund assets supporting the pension. 

When a fund has multiple member accounts which include a mix of accumulation and pensions tax may continue to apply.  However, an actuary determines what the exempt current pension income (ECPI) is. The ECPI is applied to the total of the fund’s assessable income, except for concessional contributions, which is than exempted from the fund’s assessable income and tax on the fund’s taxable income is reduced.

The impact of Contributions and Rollovers on SMSF tax obligations

Non-concessional contributions made to a SMSF are tax free. As discussed above, concessional contributions are taxed at 15%. Generally, no tax applies to rollovers received by a super fund.  However, tax may apply if a rollover includes an untaxed amount from a public sector fund.

Superannuation Tax Treatment and Strategies

Careful consideration is required in relation to a member’s financial situation when nearing retirement.  It is highly recommended to talk to your SMSF specialist or a Licensed Financial Adviser to strategically plan your future.

Segregation of assets supporting a pension

A SMSF which is eligible to use the segregation method to determine the ECPI in relation to retirement phase pension balances is able to select certain assets to be segregated and held to support the pension.  Any income, including capital gains, are disregarded to calculate the taxable income of the fund.  This is especially useful if a fund has a property with a large potential capital gain which can be segregated to the pension account and thus the capital gain can be disregarded on disposal.

Care needs to be taken to ensure the fund is eligible to use the segregation method and the income earned in relation to the segregated assets are added to the pension account being supported.

Transition to retirement income streams (TRIS) and tax implication

A TRIS is a SMSF income stream but is not a retirement phase income stream which is subject to the transfer balance cap. 

A TRIS is a pension which is allowed to be established when a member reaches preservation age, which is 60 as at 1 July 2024 and is subject to minimum pension payment requirements with a maximum pension withdrawal limit of 10% of the member’s pension balance.

A TRIS continues to be taxed at the concessional rate of 15 % until the member retires or reaches the age of 65 when a TRIS is automatically transferred to a retirement phase income stream.  There is no limit on the capital a member can choose to establish a TRIS. The major advantage of a TRIS is to allow access to superannuation monies when a member is getting close to retirement and need to top up their income as they transition into retirement by working less hours.

A TRIS is a tax-free retirement benefit as the member must be at least 60 to be eligible and no tax applies to pension payments received after a member turns 60.

Strategies for withdrawals and re-contributions

A withdrawal made as a pension or lump sum payment is made by a member who has met a condition of release.  The member then re-contributes it to the fund as a non-concessional (after-tax contribution).  

Commonly referred to as a recontribution strategy, this approach is aimed at maximising the tax-free portion of a member’s superannuation benefits. The strategy involves rebalancing the tax components and is particularly useful for estate planning purposes. When an adult beneficiary receives a super lump sum payment upon the member’s death, the applicable death tax is determined based on the tax components of the member’s balance. If an adult child inherits the super death benefit, they are subject to tax at 15% (plus medicare) on the taxed component, while the tax-free portion remains tax free in the hands of the beneficiary. This strategy can lead to significant tax savings on the death benefit.

Advice should be sought before implementing a re-contribution strategy as consideration of the contribution caps and a condition of release is based on a person’s specific circumstances. 

Maximising the benefit of franking credits in SMSFs

Australian securities which include franking (imputation) credits are refundable.  In accumulation phase the credit can offset tax on income and is possibly refunded if the franking credits exceed the tax payable.  However, when the fund is in 100% pension phase for all of the year all of the franking credits can be refunded to the SMSF boosting the fund’s investment returns. 

Dividend Franking Credit Taxable Amount Tax Refund
$10,000 $4,286 $14,286 Nil $4,286

Reviewing the fund’s investment strategy and including shares which are fully franked is part of an investment strategy that a SMSF trustee can consider.

Wind Up of SMSF and Tax Payable 

The final life cycle of a SMSF is the windup. The SMSF trustee has to calculate the amount of tax on the fund’s taxable income to determine if the SMSF has to wait on a tax refund from the ATO or pay tax to the ATO.  The SMSF is required to ensure all assets are disposed of and fund liabilities paid, and a final SMSF tax return lodged before the wind up can be completed.

Exploring Other Types of Super Funds for Tax Purposes

Today most superannuation funds are accumulation funds.  Many older funds were established as defined benefit funds, and some were “unfunded”. A SMSF is generally an accumulation fund. 

Accumulation funds are characterised by contributions, being made by members or employers, which are then invested, and the contributions and earnings are added to a member’s account balance which is eventually available to the member for their retirement.

A defined benefit fund is characterised by how a member’s retirement benefits are determined. Unlike an accumulation fund the member balance is not the accumulated contributions and earnings but is based on a formula taking into account the member’s salary on retirement, how long the member has worked for the employer and employer and member contributions.

Public sector funds and Corporate Funds

A public sector fund is generally established by a government or other statutory bodies. A corporate fund is run for employees of multimillion dollar corporations. 

A public sector fund or a corporate fund can be an accumulation fund or a defined benefit fund or possibly a hybrid of the two. 

Most defined benefit funds are public sector funds or corporate funds which are mostly closed to new fund members.   Examples of remaining large corporate defined benefit funds include Qantas, Australia Post Super Scheme and Westpac Group Plan. Examples of defined benefit funds for government public sector funds are Military Superannuation and Benefits Scheme and the Public Sector Superannuation Scheme.

Some funds are “unfunded” public sector funds, which merely means the Government pays the benefit from its revenue. 

Untaxed funds are “unfunded” schemes who do not pay tax.  However, tax is paid when the benefit is eventually paid out to a member or rolled over into a funded scheme. 

A “funded” defined benefit fund is subject to tax with special rules in relation to taxing contributions.

Retail and Industry funds

Retail and industry funds are generally accumulation funds. Retail and Industry accumulation funds are subject to the same superannuation laws as a SMSF and taxed the same. 

Nevertheless, many retail and industry superannuation funds do not fully utilise the special and standard tax rules that are at their disposal. These larger funds often have costly IT infrastructure in place, making it financially burdensome to adapt and make use of specific tax benefits. 

Large funds have to satisfy their large pool of members to optimise the position for all members and not just a few.  Investment policies are set by the trustees which can be difficult to change quickly to take advantage of market fluctuations.  

Based on the example below, a SMSF can potentially save $260,000 in tax.

 

Example – a large super fund often uses the FIFO (first in first out) method to match investment parcels when an asset such as shares are sold.  The fund holds several parcels of shares in BHP.  The fund sells 100,000 BHP shares for $49 per share on 28th June 2023. In the table below the tax on the net capital gains using FIFO is $2,900,000 at 10% = $290,000. A SMSF is flexible and can elect to use LIFO (last in first out) and thus tax would significantly be reduced to $200,000 net capital gain x 15% tax = $30,000 (taxed at 15% as the shares were held for less than 12 months)

Type of Shares No. of shares Date Purchased Cost per share $ Date Sold No of shares sold Sale per share $ Profit $
BHP 200,000 01/06/2010 20 28/06/2023 100,000 49 2,900,000
BHP 300,000 10/01/2015 30
BHP 150,000 09/12/2020 35
BHP 350,000 010/6/2023 47

Super Income Tax – The Key Takeaways

  • Tax should be part of the strategic planning for a SMSF in all life stages
  • Investment Decisions should include tax implications
  • Consider the impact of franking credits 
  • Maximising tax benefits at fund level and member level in relation to pensions
  • Minimise capital gains tax
  • Consider segregation of pension assets
  • Estate planning strategies to minimise death benefit tax
  • Review and ensure to maximise tax deductions
  • Manage contributions 
  • Consider NALI and NALE

Do you need help with navigating SMSF Tax?

Give us a call on 1300 392 544 or get in touch online.

Contact Us

If you’re interested in learning more about navigating SMSF Tax please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us

Name(Required)

Do you need help with navigating SMSF Tax?

Give us a call on 1300 392 544 or fill in the form above