How SMSFs are taxed in Australia

Like any other entity in Australia SMSFs pay tax on taxable income. SMSFs assessable income comprises of:

• • Assessable contributions

• • Interest or dividend payments

• • Rent payment from property

• • Capital gains

In Australian SMSF tax rate is set at 15% in the accumulation phase with assets held more than one year get 1/3^rd discount and once the fund is in the pension phase by following transfer balance cap rules taxed NIL.

Highest marginal tax rate of 45% apply to non-arm’s length income or non-complying funds.

Determining if the contribution made by fund members are assessable or not

Whether a contribution becomes part of the assessable income of the fund or not depends on if the contribution is concessional or non-concessional.

Concessional contribution includes employer contributions or member contributions where they are claiming deduction for that amount in their personal tax return. S290-170 notice needs to be completed for this deduction to be claimed. Concessional contributions are taxed at 15% in an SMSF.

Non concessional contributions are after taxed money which members decide to contribute to the fund. Non concessional are not taxed when deposited in the fund. Common types of non-concessional contributions are contributions by fund member where no deduction will be claimed, spouse contributions or contributions made for a child under 18 years old.

How are capital gains taxed in SMSFs

SMSFs assessable income includes capital gains from the sale of the fund assets or paid as part of the distribution. CGT discount of 1/3^rd is available for complying SMSFs where assets are held for at least 12 months. Capital gains become part of the assessable income of the fund and is calculated as:

• • Capital gains in the current year

• • Minus capital losses or unapplied capital losses carried forward from previous years

• • Minus 1/3^rd discount if eligible

If there is capital loss in the current year that cannot be offset against capital gain it will be carry forward to next year and will be offset against future year capital gains.

Non-arm’s length income (NAIL) rules

All the transactions of the SMSF must be conducted at arm’s length means at true market rate. Any buy and sell of the fund assets must reflect true market value or any fund income must reflect true market rate. A highest marginal tax rate of 45% applied where these rules are not followed.

Deductions an SMSF can claim

Like any other taxpayer in Australia a complying SMSF can claim deduction for any costs or losses occurred in generating assessable income of the fund.

Costs or any looses for the generation of the exempt pension income of the fund are not deductible as they are occurred in generating exempt income. For 100% retirement fund these expenses cannot be claimed and for the fund in both accumulation and pension phase these will be claimed according to the actuarial percentage or segregating method.