The income of your 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.
Below is some further information regarding income.
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. Complying SMSFs are entitled to a 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.
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.
Losses and outgoings relating to exempt current pension income are generally not deductible because they are incurred in earning exempt income. If the fund has both accumulation and pension members, the expense may need to be apportioned to determine the amount that the fund can deduct.
Non Arm Length Income
SMSF's must transact on an arm's length basis. The purchase and sale price of fund assets should always reflect the true market value for 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 is taxed at the highest marginal rate.
Broadly, income is non-arm's length income for a complying SMSF if it is:
- Derived from a scheme in which the parties were not 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.
Income derived by an SMSF as a beneficiary of a discretionary trust is also non-arm's length income, as are dividends paid to an SMSF by a private company (unless the dividend is consistent with arm's length dealing).
In addition, income from investments that have non-commercial conditions – for example, limited recourse borrowing arrangements with zero interest loans – may also be considered non-arm's length income.
exempt current pension income
Income a complying Self Managed Super Fund (SMSF) earns from assets held to provide for pensions is exempt from income tax. This is called exempt current pension income (ECPI). ECPI does not include assessable contributions or non-arm’s-length income.
From 1 July 2017, funds won't be able to claim ECPI for the earnings from assets supporting a Transition to Retirement Income Stream (TRIS). These earnings will be taxed at 15%. This will apply to all TRIS regardless of the date the TRIS commenced.
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 all the SMSF’s 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.
CGT relief is available to assist funds who take action to comply with the new transfer balance cap and transition to retirement income reforms before 1 July 2017. The assets eligible for CGT relief will depend on how you calculate ECPI.