The taxation of SMSFs is generally the same as retail, industry and corporate funds, however in a SMSF you have greater control of taxation matters. This is because control and flexibility over your SMSF investment decisions affords you the ability and means to consider tax when managing your fund's investments such as the effect imputation credits will have on the after-tax earnings of the fund.
The current tax rate in earnings within a superannuation fund is 15%, however, 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, and
income derived by an SMSF as a beneficiary of a discretionary trust.
Other types of SMSF income are taxed at different rates including:
No-TFN contributions, which are taxed at the top marginal tax rate.
An amount equal to the excess concessional contributions is to be included in the assessable income of the individual in the tax year the contribution is made. They will also be entitled to a 15% tax offset to reflect the tax already levied within the superannuation fund. This offset is not able to be refunded, carried forward or transferred. The net result in that the excess is effectively taxed at individual’s marginal tax rate.
In addition, the Government has introduced a charge which is levied on the tax shortfall, to reflect the delay on the collection of tax on these funds, compared to where the tax had been collected through the PAYG system. The excess concessional contributions charge is charged at the same rate as the shortfall interest charge (90-day bank accepted bill plus 3%) and begins to apply on the first day of the income year the excess concessional contributions is made and ends on the day the tax is due under the assessment.
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.
Avoiding tax penalties – keeping your SMSF compliant SMSF assets cannot be used for personal benefit. Buying a holiday house for your private use is not allowed. However, 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 from whom you may choose to seek financial advice, is well versed in SMSFs and 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.
The information in this document has been prepared by Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714. The information is general in nature and does not take into account your personal needs, objectives or circumstances and therefore, before acting on this information, you should consider whether it is appropriate for you.
BT Portfolio Services Ltd ABN 73 095 055 208 AFSL 233715 (BTPS) operates BT Panorama Investments (the investor directed portfolio service operated by BTPS). BT Funds Management Limited ABN 63 002 916 458 AFSL 233724 (BTFM) is the responsible entity and issuer of interests in BT Cash and Westpac Financial Services Ltd ABN 20 000 241 127 AFSL 233716 is the responsible entity and issuer of interests in BT Managed Portfolios. An Investor Guide is available for BT Panorama Investments and a PDS is available for BT Cash and BT Managed Portfolios (the Panorama products). These disclosure documents can be obtained from BTPS by visiting www.bt.com.au/smsf or calling 1300 881 716. A person should obtain and consider the disclosure documents before deciding whether to acquire, continue to hold or dispose of interests in the Panorama products.
In addition, BTPS is the provider of the Panorama SMSF Establishment Service and the Panorama SMSF Administration Service. The Guide and Terms and Conditions for these services are available by visiting www.bt.com.au/smsf or calling 1300 881 716
BTPS, BTFM and WFSL are subsidiaries of Westpac Banking Corporation ABN 33 007 457 141 (Westpac). Apart from any interest investors may have in Westpac term deposits or securities acquired through Panorama, an investment in or acquired through Panorama is not an investment in a bank or a bank deposit. Westpac and its related entities do not guarantee an investment in or acquired through Panorama Investments.
© Westpac Banking Corporation 2016