An SMSF is treated the same as retail, industry and corporate funds for tax purposes. However, in a SMSF you have greater control of taxation matters. The control and flexibility SMSF trustees have over your SMSF investment decisions allows them to determine when an asset is sold, which could affect when any relevant taxes are paid.
The current tax rate on earnings within a superannuation fund (including an SMSF) is 15%, but where the income is produced by assets wholly supporting an income stream such as a pension, there is no tax payable within the fund on that income.
The ATO outlines the assessable income for a complying SMSF, which includes:
employer and personal deductible contributions
interest, dividends and rent
net capital gains (less total capital losses; and less a one third capital gains tax discounts for an asset owned for a year or more).
The ATO also defines activities and investments that fall outside the 15% tax rate, including non-arm’s length income, which is taxed at the highest marginal tax rate. Non-arm’s length income includes income:
derived from a scheme or investment in which the parties are not dealing with each other at arm’s length
where the amount is more than the amount that the SMSF might have been expected to derive if those parties had been dealing with each other at arm’s length
income derived by an SMSF as a beneficiary of a discretionary trust.
Other types of SMSF income are taxed at different rates such as:
contributions made where the SMSF does not hold the member’s Tax File Number (TFN) on file. Referred to as “no-TFN contributions”, they are taxed at the highest marginal tax rate.
You can’t lend money to yourself or any other trustee, or the relatives of trustees. If your SMSF lends money to a trustee or a relative the ATO could declare your fund non-compliant and levy significant tax and penalties.
SMSF assets cannot be used for personal benefit. Buying a holiday house for your private use is not allowed. If your SMSF buys that very same holiday house and only rents it out to non-related parties, it may be permissible.
No more than five per cent of your SMSF can be invested in ‘in-house assets’, such as an investment in your own businesses. The rules regarding in-house assets are complex and you should seek independent advice.
Australian tax laws in relation to SMSFs are complex so you should ensure your accountant, financial planner or financial adviser is qualified to provide you with specialist SMSF advice. Knowing what you can (and cannot) do empowers you with the knowledge to take advantage of the control and flexibility which SMSFs may provide.