Taxation of Superannuation Funds
Posted on 22nd March 2019 by Piera-Lee Ramm
The following information provides an overview of the basics of taxation applicable to Self Managed Superannuation Funds (SMSF). Superannuation funds are essentially subject to the same taxation principles as any other taxpayer, however they receive concessions such as a reduced tax rate, in return for complying with the superannuation laws.
A complying superfund is subject to a maximum concessional tax rate of 15% on its taxable income. The tax rate is reduced further for pension accounts and capital gains is reduced to 10% for investments held over 12 months – further information is provided below.
The taxable income of a SMSF is based on total assessable income less any allowable deductions. The most common types of assessable income for complying SMSFs are concessional contributions (such as employer and personal concessional contributions), net realised capital gains and investment income such as bank or term deposit interest, dividends, distributions and rent from properties.
Any tax payable can be reduced by way of relevant rebates such as imputation credits – currently, complying SMSFs can take full advantage of any franking credits in respect of Australian dividends despite having a concessional tax rate.
An SMSF which is found to be non-complying will incur tax at the highest marginal tax rate (45% plus Medicare Levy).
Special rules apply for capital gains and special income.
A capital gain arising from the disposal of a superfund’s asset will form part of the fund’s taxable income and will be subject to tax at 15%. Where the fund has held the asset for more than 12 months, it will receive a CGT discount of one-third of the capital gain. This effectively reduces the capital gains tax to 10%.
For example, if the fund makes a $15,000 capital gain on the disposal of an asset and the discount method applies, only $10,000 would be included as taxable income reducing the tax from $2,250 to $1,500.
Different options apply to assets acquired prior to 21 September 1999.
Upon retirement (or another condition of release), a SMSF member can commence a pension from their member entitlement in the SMSF – the entitlements supporting the pension are referred to as being in pension phase.
Broadly, a complying superfund is entitled to a nil tax exemption for the income attributable to the pension phase benefits of the fund.
This means that an SMSF with members solely in pension phase will be 100% tax free. If a fund has members in both pension and accumulation phase, the proportion of net income which is exempt from tax will generally need to be determined by an actuary.
Once a condition of release is met and a lump sum or pension payment is made to a member, the lump sum or income stream itself is generally tax free in the hands of the member if they are over the age of 60, however there may be some tax payable if they are less than 60.
The following table summarises the income tax rates which generally apply to complying SMSFs.
Income Associated with Pension Phase
Capital Gains (for assets acquired on or after 21 September 1999)
Special Income and Non-Complying Funds
Special income (non-arm’s-length income)
A complying SMSF must pay tax at the highest marginal tax rate on ‘special income’ which includes:
- Dividends received directly or indirectly from a private company, unless the dividend is consistent with an arm’s length dealing
- Distributions from a trust where the SMSF does not have a fixed entitlement to income from the trust (generally discretionary trusts)
- Any other non-arm’s length income of the fund derived from a scheme where the parties are not dealing with each other at arm’s length and the amount of the income is greater than what it would have been had the parties been dealing at arm’s length in relation to the scheme
It is important to remember that an SMSF is a legal tax structure where the sole purpose is to provide for a member’s retirement. There are many issues to consider in addition to the taxation concessions enjoyed by superfunds.
Please contact our Superannuation Manager Helen Cooper on (08) 9316 7000 should you wish to discuss your specific circumstances in more detail.
Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001.