The income of your Self-managed super funds (“SMSF”) is generally taxed at a concessional rate of 15%. To be entitled to this rate, your fund has to be a ‘complying fund’ that follows the laws and rules for SMSFs. For a non-complying fund, the rate is the highest marginal tax rate. The most common types of assessable income for complying SMSFs are assessable contributions, net capital gains, interest, dividends and rent.
Assessable contributions
Certain contributions received by a complying SMSF are included in its assessable income and are usually taxed as part of the SMSF's income at 15% (or 47% for non-complying SMSFs). These ‘assessable contributions’ include:
- employer contributions (including contributions made under a salary sacrifice arrangement);
- personal contributions that the member has notified you they intend to claim as a tax deduction;
- generally any contribution made by anybody other than the member, with limited exceptions such as spouse contributions and government co-contributions.
Your SMSF’s assessable income includes any net capital gains, unless the asset is a segregated current pension asset. Complying SMSFs are entitled to a capital gains tax (CGT) discount of one-third if the relevant asset had been owned for at least 12 months.
A net capital gain is the total capital gain for the year- total capital losses for that year and any unapplied capital losses from earlier years - the CGT discount and any other concessions.
A capital loss (for example, losses on the sale of commercial premises) is not an allowable deduction and is only able to be offset against capital gains. If capital losses are greater than capital gains in a financial year, they must be carried forward to be offset against future capital gains.
Deductions
A complying SMSF is entitled to deduct – from its assessable income – any losses or outgoings 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.
Non-arm’s length income
SMSFs must transact on an arm's-length basis. The purchase and sale price of fund assets should always reflect the true market value of the asset, and the income from assets held by your fund should always reflect the true market rate of return.
Any non-arm's length income (NALI) is taxed at the highest marginal rate.
Broadly, income is NALI for a complying SMSF if it is:
- derived from a scheme in which the parties weren't dealing with each other at arm's length, and
- more than the SMSF might have been expected to derive if the parties had been dealing with each other at arm's length.
A complying self-managed super fund (SMSF) normally pays tax at the concessional rate of 15%. An SMSF can receive further tax concessions once it begins paying superannuation income streams (commonly known as pensions) that are in the retirement phase.
Investment income a SMSF receives from its assets is tax exempt to the extent that those assets are supporting retirement phase income streams. This income is called exempt current pension income (ECPI).
You can claim ECPI in your SMSF annual return once your SMSF begins paying one or more retirement phase income streams. However, your SMSF is not automatically entitled to ECPI – there are steps that you must take to be able to claim it.
This article is for informational purposes only and does not form part of our advice. This article is based on Australia Taxation Office guideline. Please contact our team if you need any assistance.
Claire Chang, 0497 131 419, claire.chang@changadvisory.com.au, wechat: clairechang26
Michelle Cui, 0433 539 870, michelle.cui@changadvisory.com.au, wechat: michellejc
Claire Chang