SMSF is subject to income tax but receive concessional treatment if they are complying funds. A complying SMSF taxable income is generally taxed at a rate of 15%, compared with 45% for a non-complying fund.
The most common types of assessable income for complying SMSF is:
• assessable contributions
• interest, dividends and rent
• net capital gains.
However, certain types of SMSF income are taxed at different rates:
• non-arm’s length income is taxed at 45%
• no-TFN contributions are taxed at 46.5%
• current pension income is exempt from tax
• concessional contributions above the concessional cap are taxed at 46.5%.
Certain contributions received by a complying SMSF is included in its assessable income and is usually taxed as part of the SMSF income at 15%. These ‘assessable contributions’ include:
• employer contributions (including contributions made under a salary sacrifice arrangement)
• personal contributions which 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.
Exempt current pension income
Ordinary income and statutory income that a complying SMSF earns from assets held to provide for super income stream benefits is exempt from income tax. This is called exempt current pension income (ECPI). ECPI does not include assessable contributions and non-arm’s length income.
You can claim the tax exemption in your SMSF annual return once your SMSF begins paying super income stream benefits (commonly referred to as pensions). However, your SMSF is not automatically entitled to the exemption. To claim the exemption in the SMSF annual return, there are steps you must take prior to starting payment of the super income stream benefit, such as ensuring that all of the SMSF assets are re-valued to their current market value.
If an SMSF has income tax losses (not capital losses), the amount of the loss should be reduced by the amount of the net ECPI (this is the amount of ECPI less any expenses that were incurred in deriving ECPI). The remaining tax losses can be offset against any assessable income of the SMSF or carried forward to the next financial year.
SMSF assessable income includes any net capital gains.
Complying SMSF is entitled to a CGT discount of one-third if the relevant asset had been owned for at least 12 months.
A capital loss (for example, losses on the sale of shares) is not an allowable deduction and is only able to be offset against capital gains. If capital losses are greater than capital gains in an income year, they must be carried forward to be offset against future capital gains.
Like other taxpayer entities, 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.
Expenses that a complying SMSF can deduct include:
• the supervisory levy
• insurance premiums for death and disability policies – these are deductible
provided the policies have the necessary connection to a liability of the fund to
provide death or permanent incapacity benefits (not other types of disability benefits)
• accounting and auditor fees
• interest – a complying SMSF is generally prohibited from borrowing money or
maintaining an existing borrowing of money, but interest incurred in gaining or producing
assessable income would be deductible.
Losses and outgoings relating to exempt current pension income are generally not deductible because they are incurred in earning exempt income.