SMSF Technical Education & Strategies

Taxation within a SMSF

One of the basic principles of superannuation is that it is a low taxation vehicle. The Government gives these tax concessions in return for your SMSF complying with the super laws, which restrict when you can access these funds.

The following is a overview of the basics of the taxation within a SMSF, assuming that the fund is a complying superannuation fund.

Taxable income

The trustees of a complying SMSF are liable to pay tax (from the assets of the SMSF) on the taxable income of the fund for each year of income. The taxable income of a SMSF is calculated as:

Total assessable investment income + concessional contributions + taxable capital gains – allowable deductions.

This taxable income is taxed at the concessional rate of 15%.

However, the are some special rules for:

- capital gains
- special income

And a further reduction of tax payable by way of any rebates such as imputation credits.

Capital gains tax:

A capital gain arising from the disposal of an asset of the SMSF will form part of the fund’s taxable income and will be subject to tax at 15%. However there are some further concessions:

 

• - Where the fund has held the asset for more than 12 months, the fund will receive a discount of one-third of the capital gain (effectively reducing the capital gains tax to 10%). This is known as the CGT discount method. For example, if the fund makes a $10,000 capital gain on the disposal of an asset and the discount method applies, only $6,666.66 would be counted as taxable income.

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• - Where the fund acquired the asset prior to 21 September 1999 and has held it longer than 12 months, the fund has the choice of using either the above discount method or the frozen indexation method (frozen at 30 September 1999) to calculate the capital gain. If the fund acquired the asset on or before 30 June 1988, the asset is deemed to have been acquired by the fund on 30 June 1988.

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• Special income:

• Special income of a SMSF is taxed at the highest marginal tax rate i.e. 45%. It includes:
  
  

• - Dividends received directly or indirectly from a private company, unless the Commissioner is of the opinion that it would be unreasonable having regard to a number of factors.

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• - Distributions from a trust, where the SMSF as beneficiary had no fixed entitlement (i.e. discretionary trust distributions)

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• - Any other income of the fund where the parties were not dealing with each other at arm’s length, or the income derived is greater than that which could be expected if the parties had been dealing with each other at arm’s length (i.e. excessive unit trust distributions).

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• Concessional (Taxable) contributions

• Concessional contributions (or formerly known as Taxable contributions) are those contributions generally made up of Employer contributions, and those personal contributions where the member has claimed a tax deduction. Contrary to popular belief, these contributions actually make up part of the fund’s taxable income. For more detailed information, see our article on “Contributions tax”.

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• Use of imputation credits

• Once the 15% tax rate has been applied to the taxable income of the fund, the use of imputation credits may be able to reduce, or even eliminate the actual tax payable. For a more detailed explanation, see our article “The value of imputation credits”.

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• Member goes into the pension phase:

• Upon retirement (or other condition of release), members of your SMSF will commence a private pension from the fund. From a tax perspective, any income and capital gains generated from what is known as “segregated pension assets” of the fund is subject to zero tax within the fund. That’s right, zero. In this case, any imputation credits received can be used to reduce the tax payable by other members of the fund who are in the accumulation phase. This allows incredible flexibility. If there are no "accumulation" members, then these imputation credits can be received by the SMSF as a refund from the ATO.
  
  Once a lump sum or pension payment is made to a member, the lump sum or income stream itself is tax free in the hands of the member if they are over the age of 60, however there may be some tax payable if you are less than 60 (see the "Taxation of money coming out of your SMSF" section for more detail.