How Are Self-Managed Super Funds Taxed?
Written by: Brittany Bell l Accounting Team
Albert Einstein:
The hardest thing in the world to understand is the income tax!
Tax, tax and more tax, we are surrounded by tax everywhere and we love a good acronym. PAYG, CGT, GST, and FBT – sounds like I’m just listing the alphabet! What about SMSF, what does this represent? From our earlier blog, we learnt that an SMSF is a ‘self-managed super fund’. We investigated how an SMSF differs from a ‘normal’ superannuation fund, and how you can exercise more control, choice, and flexibility, while understanding that comes with great responsibility.
Missed our last article on SMSFs? Check out our previous blog: When Is It Time To Consider a Self-Managed Super Fund?
Now, we are deep-diving into how SMSFs are taxed!
The good news – SMSFs are taxed under the same laws as ‘normal’ superannuation funds. Does this make our journey through superannuation taxation any easier? It sure does! You can apply any existing knowledge you have about superannuation and tax to an SMSF and if you are here for a superannuation tax crash course, you are in the right place. We are going to break this down into the most common areas that taxation is applied in an SMSF and cover income, contributions, capital gains and what moving into pension phase impacts. Let’s get into some nitty gritty.
Taxation on Income
The income of superannuation and a self-managed super fund is generally taxed at a concessional rate of 15% for a ‘complying fund’ (meaning you are following the rules and the law). The Australian Tax Office identifies the most common types of assessable income for SMSFs fall into the following categories:
- Assessable contributions;
- Net capital gains;
- Interest;
- Dividends (also Distributions); and
- Rent.
As a trust, a complying SMSF is also entitled to claim deductions against its assessable income. Expenses incurred by an SMSF, and fit the below criteria can reduce the assessable income of the fund. Typically, these are expenses 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;
- In accordance with a properly formulated investment strategy; and
- Allowed under the SMSFs trust deed and superannuation laws.
Common examples of deductions for SMSFs include:
- Accounting fees;
- Audit fees;
- Adviser fees;
- Investment management fees (such as brokerage, rental property expenses and bank fees); and
- Investment Property expenses.
Taxation on Contributions
There are several types of superannuation contributions. There is an entire vocabulary for contributions that intermittently changes and is used interchangeably throughout the years. Concessional, non-concessional, downsizer, pre-tax, after-tax, employer, voluntary, salary sacrifice and reportable – you get the idea. For superannuation taxation, we will break this down into assessable and non-assessable contributions.
Assessable Contributions
Assessable contributions include the following contribution types:
- Employer contributions (for example: superannuation guarantee);
- Salary sacrifice contributions (additional contributions you deduct from your pre-tax income and your employer pays on your behalf);
- Personal contributions that the member has notified and intends to claim as a tax deduction; and
- Broadly, any other contributions made for a member on their behalf by anybody else (excluding specified spouse and government co-contributions).
These assessable contributions are taxed as income in superannuation and have 15% tax deducted from them at the time of the fund receiving the contribution.
Non-Assessable Contributions
Contributions (that you are not claiming as a tax deduction) made into superannuation from after-tax income are considered non-assessable contributions and do not attract a 15% tax. These include the following contribution types:
- Non-concessional contributions;
- Downsizer contributions;
- Government co-contributions; and
- Eligible spouse contributions.
No matter what type of contribution you make, be aware and always consider the relevant contribution caps and eligibility requirements (such as age and total super balance) in making specific contributions. If you breach the rules and the caps, you may be required to pay additional tax or penalties on the contributions and associated earnings, as determined by the ATO.
Taxation on Capital Gains
The assessable income of an SMSF includes any net capital gains (unless the asset sold was solely supporting a pension account in the self-managed super fund – more on this later). In a self-managed super fund, you as the trustee make specific decisions on which asset(s) need to be sold at relevant times, meaning you can influence the timing and amounts of any capital gains tax incurred. For any asset sold that has been owned for at least 12 months, the SMSF is also entitled to a capital gains tax (CGT) discount of one-third.
A net capital gain is included in the assessable income of the fund and is taxed at the concessional rate of 15%. A net capital gain is determined as:
- Total capital gain for the year (capital proceeds less cost base which resulted in a profit)
less
- Total capital losses for that year (capital proceeds less cost base which resulted in a loss)
less
- Any unapplied capital losses from earlier years that have been carried forward
less
- The CGT discount (for an SMSF, this is one-third)
Taxation + Pension Phase
When your superannuation fund starts paying an income stream (also known as a pension account) that is in retirement phase, income supporting the pension account is tax exempt. What does this mean? Here are three simplified scenarios:
- Full accumulation phase for the entire income year (no retirement phase pensions)
- All assessable income is taxed at the concessional rate of 15%
- Full retirement pension phase for the entire income year (no accumulation benefits and no assessable contributions being received)
- All income is supporting retirement phase pension accounts and therefore all tax exempt!;
- Capital gains and losses are disregarded (importantly capital losses cannot be carried forward); and
- No deductions can be claimed (as there is no assessable income to claim against).
- A mix of accumulation and retirement pension benefits exist in the fund for the income year (the most complex example)
- The fund needs to determine the proportion of ‘exempt current pension income’ – also known as ECPI (another acronym!); and
- ECPIT is the income that supports the retirement phase pension benefits and is calculated in several different ways depending on fund structure, eligibility, financial year applicable and other requirements.
Calculating ECPI in superannuation is complex. A situation may arise in an SMSF for example, one member over 65 may have retired and started a pension on their benefits, while their spouse aged 59 continues to work. This means that the fund has a mix of exempt income and assessable income.
In simplistic terms, this means the fund needs to obtain an Actuary Certificate, where Actuaries have determined the proportion of income that belongs to the retirement pension benefits (and is therefore exempt from paying tax) compared to the accumulation benefits (which has 15% tax applied). I won’t be going into the technical explanation here of the rules and calculations. Suffice to say, the more member benefits held in retirement pension phase and the longer they are held there, the less tax that is payable. Approaching and being in retirement phase in your superannuation is a critical financial planning moment, and regardless of whether you have a self-managed super fund or not, you should consider seeking financial advice in structuring your affairs accordingly.
Canny Advisory + Your Self-Managed Super Fund
This is not the end of the superannuation taxation road; we have covered a few key taxation areas in this blog. Self-managed super funds may have other tax applicable in situations where they are ‘non-complying’ and receive ‘non-arm’s length income’ (which we won’t be covering here today). Superannuation also has other areas of tax, such as tax where superannuation withdrawals are made and tax when someone dies.
As for our original question – how are self-managed super funds taxed? – you can have peace of mind that they are not taxed any differently to other super fund, rather their nature and structure allow for more control, choice, and flexibility in planning your retirement benefits – one of the many advantages of a self-managed super fund.
Get in touch with our team today to talk over your self-managed superannuation fund options.
