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Australia SMSF Tax Guide

Australian self-managed super fund (SMSF) taxation. The guide covers: the SMSF establishment — the SMSF is the 'superannuation fund' that is 'managed by the members' (the 'trustees') for the 'retirement purposes'; the SMSF must have 1 to 6 members (the 'individual trustees' or the 'corporate trustee'); the 'SMSF establishment' requires the 'trust deed', the 'trustee registration', and the 'ABN' and the 'TFN' for the fund; the SMSF taxation — accumulation phase — the 'SMSF income' is taxed at the 'concessional rate' of 15% (the 'superannuation fund tax rate'); the 'concessional contributions' (the 'employer contributions' and the 'salary sacrifice contributions') are taxed at 15% (the 'contributions tax'); the 'non-concessional contributions' (the 'after-tax contributions') are NOT taxed in the 'SMSF'; the 'SMSF' with the 'investment income' (the 'dividends', the 'interest', the 'rental income', the 'capital gains') pays the 'tax' at the '15% rate'; the 'capital gains' in the 'SMSF' are taxed at the 'effective rate' of 10% (the 'one-third discount' on the 'capital gains' for the assets held for at least 12 months — the 'SMSF CGT discount' of one-third, so the effective rate is 10% = 15% * 2/3); the SMSF taxation — pension phase — the 'SMSF' that pays the 'pensions' (the 'account-based pension') to the 'retirees' can claim the 'exempt current pension income (the 'ECPI')' — the 'ECPI' is the 'tax exemption' for the 'income from the assets' that support the 'pension liabilities'; the 'ECPI' is calculated as the 'proportion of the fund assets' that are in the 'pension phase' (the 'pension assets' divided by the 'total assets'); the 'pension phase' income is 'tax-free' if the 'ECPI' is 100% (the 'full pension phase'); the SMSF investment rules — the 'sole purpose test' (the 'SMSF' must be maintained for the 'sole purpose' of providing the 'retirement benefits' to the 'members'); the 'in-house assets' limit (the 'in-house assets' of the 'SMSF' — the 'investments' in the 'related parties' and the 'related entities' — must NOT exceed 5% of the 'total assets' of the 'SMSF'); the 'limited recourse borrowing arrangement (the 'LRBA')' — the 'LRBA' allows the 'SMSF' to borrow the 'money' to acquire the 'single asset' (the 'single acquirable asset' — the 'real property' or the 'shares') under the 'limited recourse borrowing' rules (the 'Section 67A of the SIS Act'); the 'LRBA' is the 'gearing' strategy for the 'SMSF' to invest in the 'property' or the 'shares' using the 'borrowed funds'; the SMSF reporting and the audit — the 'SMSF' must lodge the 'annual return' (the 'SMSF annual return — the 'SAR') with the 'ATO' each year; the 'SMSF' must have the 'annual audit' by the 'approved SMSF auditor' (the 'SMSF audit' under the 'SIS Act'); the 'SMSF' must pay the 'supervisory levy' of $259 per year (the 'SMSF supervisory levy' paid to the 'ATO').

SMSF Taxation Rates

  • Accumulation phase — 15%: The 'SMSF income' (the 'investment income' and the 'contributions tax') is taxed at 15%. The 'concessional contributions' are taxed at 15% (the 'contributions tax'). The 'capital gains' on the 'assets held for at least 12 months' are taxed at the effective rate of 10% (the 'one-third CGT discount').
  • Pension phase — 0% (ECPI): The 'exempt current pension income (ECPI)' is the 'tax exemption' for the 'income from the pension assets'. The 'ECPI' is calculated as the 'proportion of the fund assets in the pension phase'. The 'pension phase' income is 'tax-free'.
  • Non-concessional contributions: The 'non-concessional contributions' (the 'after-tax contributions') are NOT taxed in the 'SMSF'. The 'non-concessional contributions cap' is $120,000 per year (or $360,000 under the 'bring-forward rule').

For the superannuation contributions caps and the tax rates, see our Superannuation Guide →.

SMSF Investment Rules

  • Sole purpose test: The 'SMSF' must be maintained for the 'sole purpose' of providing the 'retirement benefits'. The 'SMSF' must NOT provide the 'pre-retirement benefits' to the 'members'. The 'sole purpose test' is the 'core test' under the 'SIS Act'.
  • In-house assets limit (5%): The 'in-house assets' (the 'investments' in the 'related parties' and the 'related entities') must NOT exceed 5% of the 'total assets'. The 'excess in-house assets' must be 'reduced' or the 'penalty tax' of 45% applies (the 'in-house assets tax').
  • LRBA (borrowing): The 'limited recourse borrowing arrangement (LRBA)' allows the 'SMSF' to borrow the 'money' to acquire the 'single asset'. The 'LRBA' is subject to the 'arm's length terms' and the 'limited recourse' (the 'lender' can only 'recourse' to the 'acquired asset' in the 'default').

For the SMSF audit and the reporting requirements, see the ATO website (www.ato.gov.au/smsf).

SMSF Pensions & Retirement

  • Account-based pension (ABP): The 'SMSF' can pay the 'account-based pension' from the 'preservation age' (55 to 60 years, depending on the 'date of birth'). The 'ABP' is the 'superannuation income stream'. The 'ABP' must meet the 'minimum pension payment' (the 'minimum drawdown rate' — 2% to 14% depending on the 'age').
  • Transition to retirement (TTR): The 'TTR' pension allows the 'members over the preservation age' to access the 'superannuation' while still 'working'. The 'TTR' income is 'taxed' at the 'marginal rate' with the '15% tax offset'. The 'TTR' earnings are 'NOT exempt' from the '15% tax' (the 'ECPI' does NOT apply to the 'TTR').
  • Death benefits: The 'SMSF death benefits' are paid to the 'dependants' (the 'spouse', the 'children under 18', the 'financial dependants') — the 'death benefits' are 'tax-free' if paid to the 'dependants' (the 'tax-free component' and the 'taxable component — the element taxed').

For the super death benefits and the estate planning, see our Inheritance & Estate Tax Guide →.