A lot of skills and knowledge are required to set up a self managed super fund (SMSF). One of the things that people frequently inquire about is SMSF Tax, i.e. the taxation rules that apply to self managed super funds.
By way of background, a self managed super funds is a way of providing for retirement in Australia. It is a type of fund that allows fund’s trustee to also be its main beneficiary. This means when someone sets up their own SMSF they can invest their superannuation according to their own preferences. That is why SMSFs are sometimes also called DIY super (Do it yourself superannuation).
Other super funds in Australia include funds that are managed and administered by a third party. This could by an industry super fund, an employer stand-alone fund or what is called a “retail fund”.
Someone who sets up their own super funds has full control over investment decisions, as long as they are compliant with the applicable laws and regulations.
However, they also have the responsibility to ensure all their investments are legal, that their ongoing administration and reporting complies with the ATO rules, that the fund is audited annually and that tax is paid regularly.
SMSF Tax
Self managed super funds are subject to income tax in Australia, just as any other investment or fund. However, SMSFs receive concessional treatment, as long as they are compliant with the rules and regulations set out by the Australian Taxation Office (ATO).
As at August 2011, according to the ATO a complying SMSF’s assessable income is generally taxed at a rate of 15%, while for a non-complying fund the rate is 45%. Please note that all the figures quoted in this article are subject to change and should be verified with the ATO.
The ATO states that the most common types of assessable income for complying SMSFs are:
• assessable contributions
• interest, dividends and rent
• net capital gains.
It is important to note, however, that 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%.
A complying SMSF is entitled to claim deductions for expenses, such as the supervisory levy and auditor fees, that are incurred in gaining or producing assessable income.
SMSFs and GST
According to the ATO, self-managed super funds must register for goods and services tax (GST) if they have a GST turnover of $75,000 or more. Most SMSFs don’t have this much GST turnover and so don’t need to register.
Independent SMSF Audits
The ATO requires that every self-managed super fund should be audited annually by an independent, ATO approved auditor. The main task of the SMSF auditor is to examine the funds financial statements and assess the fund’s compliance with the laws and regulations governing superannuation in general and SMSFs in particular, this includes SMSF tax.
The trustee appoints the auditor who is then required to provide a report to the trustee. The auditor report must be given to the trustee the day before the fund is required to lodge its SMSF annual return.
Because of the complexity of SMSF tax, it can be highly beneficial to work with an experienced superannuation accountant and SMSF auditing expert. It makes it much easier to manage the SMSF administration and ensure ongoing compliance of your self-managed super fund.