CPD: Tax and Self-Managed Super Funds

Advisers need enhanced knowledge the tax regime and requirements that apply to clients using Self-Managed Super Funds.

Super assets reached $4.2 trillion at the end of 2024, with SMSF assets forming roughly one third of the superannuation savings pool and exhibiting a six percent year on year growth^[1]. This article, proudly sponsored by Allianz Retire+, explores the tax benefits of using SMSFs, the tax regime that applies and requirements particular to the sector.

The first self-managed superannuation fund (SMSF) was established in 1999. A quarter of a century later, SMSFs have amassed more than one trillion dollars in assets, held by some 638,411 SMSFs, representing 1,184,287 members^[2].

Figure one examines the number of SMSF establishments, windups and total numbers of both funds and members. The financial year ended 30 June 2024 continued the strong trend in the establishment of new SMSFs and saw the number of exits decline. The total number of both funds and members continued to increase.

Figure two illustrates the growth in SMSF assets, from both an average and median perspective. The averages are typically skewed by larger numbers, so the median assets per member and per SMSF are more typical for the majority of funds.

The latest ATO statistical report (December 2024) showed that SMSF members continue to be heavily invested in equities with listed shares comprising 27 percent of total SMSF assets (compared to 29 percent at December 2023). Real property, both non-residential and residential is the next largest asset class, at 16.5 percent, closely followed by cash and term deposits at 16 percent.

SMSF regulatory environment

All super fund trustees must meet the sole purpose test: to run their fund for the sole purpose of providing retirement benefits as outlined in the Superannuation Industry (Supervision) Act 1993 (SIS Act). SMSF trustees are no different. Despite the obligations SMSF trustees must meet, there are numerous reasons more than one trillion dollars is invested in these funds.

The most commonly cited reasons for managing retirement savings via an SMSF can be explained by one or more of the following:

• Direct ownership of assets rather than beneficial ownership through a superannuation fund
• Ability to own direct residential or commercial property
• Ability to borrow money via a closed trust to be used for investment purposes
• Ability to own a broader range of direct assets, including collectibles and works of art
• Capacity to manage tax more effectively.

While SMSFs undoubtedly have several advantages, whether or not a client can maximise the benefits of the SMSF structure will be dependent on the fund’s investment objective and those of its members. The reasons in favour of SMSFs outlined above are not relevant for all funds or all members and, in some cases, those benefits may be outweighed by the costs and time requirement associated with managing an SMSF.

Requirements for managing an SMSF include:

• Trustees need the skills and time to commit to managing an SMSF
• Trustees must operate the fund within the law that regulate SMSFs; failure to do so may lead to penalties for the trustee/s and tax consequences for the fund
• Trustees need to make investment decisions for the SMSF that are in the best interests of all members, while complying with the restrictions on investments applicable to SMSFs
• Trustees must comply with all ATO requirements for SMSFs as failure to conform can lead to a loss of tax concessions for the fund.

It can be expensive to establish and manage an SMSF and the fees paid to operate an SMSF may be more than would be paid to another type of super fund. One of those expenses is the annual audit. Each year, an SMSF must undergo an independent audit, undertaken by an independent approved SMSF auditor that is registered with ASIC. An approved auditor will:

• Examine the SMSF’s financial statements
• Assess the SMSF’s compliance with superannuation laws
• Provide trustees with a detailed report
• Report any contraventions of the SIS Act to the ATO.

Once the audit has been finalised, trustees need to complete and lodge a SMSF Annual Return (SAR) by its due date. The SAR is a comprehensive report that covers the SMSF’s investments, transactions and benefit payments. It also reports super regulatory information, member contributions and is used to pay the SMSF supervisory levy.

This levy is a fee charged by the ATO for its supervision and is added to the tax return for each SMSF. The levy has been $259 since the 2014-15 financial year and remains the same for the current financial year. Calculating the correct tax payable is up to the individual preparing the SAR.

If the SAR is lodged more than two weeks late, the SMSF won’t be able to receive contributions or rollovers until the SAR is lodged. Once an SAR is lodged, the trustee must pay any tax owing as well as an annual supervisory levy.

In cases where an SAR isn’t lodged for a longer time period, there are a range of penalties issued by the ATO. These range from financial penalties through to (in more extreme cases) the disqualification of the fund’s trustee/s.

Given the requirements of administering an SMSF, most fund trustees elect to pay for additional help. Services sought by SMSF trustees include:

• Preparation of the SAR
• Valuation of the SMSF’s assets at market value to accurately prepare the fund’s accounts, statements and SAR; some classes of assets must be valued and reported in a specific way detailed by the ATO and trustees must be able to provide evidence of the valuation
• Actuarial certificates for SMSFs paying income streams (pensions)
• Financial advice, including asset allocation and investment recommendations
• Tax advice
• Legal fees
• Assistance with fund administration
• Insurances for members.

It’s important that your clients understand that one of the benefits of SMSFs is not early access to their retirement savings. If money is withdrawn from an SMSF earlier than superannuation rules permit, penalties can apply and include:

• The amount withdrawn can be taxed at penalty rates
• The SMSF can potentially lose its tax concessions
• The trustees may be penalised for allowing fuds to be released early.

Tax and SMSFs

Each SMSF must register with the ATO for both an ABN and TFN. If this isn’t done, the fund will not be registered as an SMSF and therefore not entitled to tax concessions nor will employers be able to claim deductions for contributions they make to the fund.

The SMSF structure akin to a company in that SMSFs are deemed to have income (including contributions and investment earnings) and expenses for tax purposes. SMSF members are entitled to the same reduced tax rates that are available through public super funds; a basic tax rate of 15%, which can be further reduced by offsetting expenses and tax credits. Payments received after the age of 60 are tax free.

While these tax benefits are common to all super funds, SMSFs have more flexibility to implement tax strategies around capital gains, taxable income or franking credits to minimise the tax payable. To illustrate, a key advantage of using an SMSF is that trustees can control when assets are disposed of. This allows the trustee to manage capital gains in a more targeted way. For example, an SMSF acquires an asset today and it appreciates by 50% by the time the fund’s members retire. That asset can then be sold to provide income to the complying pension stream with no tax owing on the realised capital gain of the asset.

The flexibility of SMSFs enable trustees and their advisers to optimise tax efficiency for the fund’s members. By tailoring strategies to the individual circumstances of members, and leveraging options such as contributions, reserves and distributions, trustees can mitigate overall tax liabilities within the fund. In contrast, personal circumstances cannot be factored into pooled superannuation funds because members must be treated consistently.

The SMSFs structure also provides flexibility with respect to managing taxable liabilities. An SMSF requires only one tax return despite potentially having up to six members. If the fund includes retired members who are tax-exempt, while others remain subject to the 15% tax environment, strategic allocation of earnings from the tax paying members to the retired members can yield tax advantages.

Income tax

As long as an SMSF is a ‘complying fund’ – one that follows the laws and rules for SMSFs – income is taxed at the concessional rate of 15%. Non-complying funds have the highest marginal tax rate applied to income received by the fund. The most common types of assessable income for complying SMSFs are assessable contributions, net capital gains, interest payments, dividends and rent. The following commentary on tax refers to complying funds.

Contributions

Contributions received by an SMSF are included in its assessable income and are generally taxed as part of the SMSF’s income at 15%. Assessable contributions include:

• Employer contributions, including those made via salary sacrifice
• Personal contributions where the fund member has notified the trustee they intend to claim as a tax deduction

These contributions are taxed in the SMSF as income, but at the concessional rate of 15% up to the contributions cap. The cap is currently $30,000 per year and the non-concessional contribution cap is currently $120,000.

Non-concessional contributions made into an SMSF are not included in the fund’s assessable income. These may include:

• Personal contributions made by the member for which no income tax deduction is claimed
• Contributions made for a spouse
• Contributions made for a child under 18 years old.

In the case a member does not provide their TFN, the SMSF will have to pay additional tax on their mandated employer contributions and cannot accept other types of contributions. The additional tax rate is 34% for complying SMSFs and the maximum tax rate + 2% for non-complying SMSFs.

There is a significant difference in the treatment of contributions between super funds and SMSFs.  Because contributions to SMSFs are treated as income, tax is levied once the expenses of the SMSF have been deducted.

Earnings

An SMSF in the accumulation phase will have income earned from its investments taxed at 15%. Franked dividends paid by an Australian company may entitle the SMSF to a tax credit, which will reduce its overall income tax liability. As with income received from contributions, income derived from earnings will be taxed on an after expenses basis.

When an SMSF has members that have reached the pension stage, the investment income received by the fund can be tax-free. This is referred to as exempt current pension income, and it can be used to offset the tax liabilities of the SMSF where the fund has other members who have not yet retired. 

Non-arm’s length income

It is a regulatory requirement that an SMSF must always transact on an arm’s-length basis. The purchase and sale price of fund assets should always reflect the true market value of the asset and the income from assets held by an SMSF should always reflect the true market rate of return. The ATO will tax any non-arm’s length income at the highest marginal rate.

The ATO considers income to be non-arm’s length income for a complying SMSF if it is:

• Derived from a scheme in which the parties weren’t dealing with each other at arm’s length
• More than the SMSF might have been expected to derive if the parties had been dealing with each other at arm’s length.

For example, the ATO considers income derived by an SMSF as a beneficiary of a discretionary trust to be non-arm’s length income, as are dividends paid to the SMSF by a private company (unless that dividend is consistent with arm’s-length dealing).

Non-arm’s length income also includes income derived by an SMSF from a scheme where the parties weren’t dealing with each at arm’s length and where the fund incurred lower expenses in deriving that income than would be expected if the parties were dealing on an arm’s-length basis.

Deductions

Like a company, a complying SMSF can deduct losses or expenses from its assessable income, as long as those losses or costs that are incurred in producing or gaining assessable income or incurred in running a business for the purpose of producing that income. These losses and expenses reduce the amount of tax payable by the SMSF.

However, for those SMSFs wholly in pension phase generally cannot deduct losses and costs relating to income because they pay no tax. If a fund has both accumulation and pension members, the expenses generally need to be apportioned to determine the amount that the SMSF can deduct.

Expenses aren’t allowable deductions when they are incurred in gaining or producing exempt income, non-assessable income or expenses of a capital or private nature.

The ATO notes the following as specific deductions that can be claimed in full or in part:

• Managing the tax affairs of the SMSF or complying with an obligation imposed on the SMSF that relates to its tax affairs, for example, the SMSF Supervisory Levy
• Death, total and permanent disability, terminal illness and income protection premiums to the extent specified in the relevant law.

Operating expenses incurred by an SMSF that are generally deductible include:

• Management and administration fees
• Audit fees
• Australian Securities & Investments Commission (ASIC) annual fee.

When it comes to investment expenses, the exact nature of those expenses is critical when determining deductibility. Examples of deductible investment-related expenses include:

• Interest
• Ongoing management fees or retainers paid to investment advisers
• Costs of servicing and managing an investment portfolio, such as bank fees, rental property expenses, brokerage fees
• The cost of advice to change the mix of investments, whether by the original or a new investment adviser, provided any changes do not lead to the creation of a new financial plan.

If the investment-related advice covers other matters or relates in part to investments that do not produce assessable income, only a proportion of the fee is deductible.

GST

Most SMSFs don’t need to register for GST although those with an annual GST turnover of more than $75,000 must register for GST. Annual GST turnover doesn’t include contributions, interest and dividends or residential rent or income generated outside Australia. It does include gross income from the lease of equipment or commercial property.

Capital gains tax

In an SMSF, a capital gain is any profit made from selling an asset. It’s classed as income and taxed as such. Similarly, any loss made from selling an asset is deemed a capital loss. Both need to be included in an SMSF’s annual return to the ATO.

Because capital gains are treated as regular income and an SMSF’s income is taxed at the concessional rate of 15%, capital gains are also subject to a 15% tax.

If an asset has been held by a complying SMSF for more than 12 months before it is sold, any capital gain may be eligible for a tax discount of 33.33%. That means only two-thirds of the capital gain will be taxed – i.e. at the rate of 10%.

SMSFs pay tax on net capital gains, calculated as:

• The fund’s total capital gains for the year
• Less any capital losses for that year and any unapplied capital losses from earlier years
• Less the CGT discount of 33.33% and any other concessions (if eligible).

A capital loss is not an allowable deduction and can only be used to 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.

If the capital gain is used to fund an income stream (i.e. a member’s pension) then zero tax will be applied to the proportion of capital gain funding the pension.

SMSFs in pension phase

When income from a complying SMSF is used to provide a pension income stream, no tax is payable. Those SMSFs invested in Australian equities can claim franking credit refunds from the ATO for any excess credits.

Investment income received by an SMSF is tax exempt to the extent that those assets are supporting retirement phase income streams. This income, exempt current pension income, is claimed in the SAR once the SMSF commences payment of one or more retirement phase income streams. It is important to note that an SMSF is not automatically entitled to exempt current pension income – the trustee/s must take several steps to be able to claim it.

A note on SMSFs and property investments

One of the key benefits of an SMSF is the ability to directly own commercial or residential property. There are two primary advantages to holding property inside an SMSF.

1. A concessional tax on rental income. Rent received by an SMSF will be taxed at a maximum rate of 15%. Some expenses related to ownership of the property will generally be tax deductible to the fund, lowering the effective tax rate. These expenses include such as rates and property maintenance.
2. Secondly, superannuation tax rates also apply to a capital gain resulting from an increase in a property’s value. Consequently, depending on when the property is sold, any capital gains the SMSF makes on its sale could be tax-free.

For example, if a median-priced residential property of $667,000 is bought by a typical investor and sold a decade later for double the value, their capital gains tax can be $157,000. If it eventually doubles again in value, the tax bill climbs above $300,000. If that property is held in a SMSF member in retirement, the CGT is zero after age 60^[3].

Overall, self-managed super funds offer trustees flexibility to develop strategies that enhance tax efficiency for the fund’s members. This flexibility enables a customised approach that considers each member’s unique circumstances, using methods such as tailored contributions, strategic use of reserves and personalised distributions to reduce overall tax liabilities within the fund. Unlike pooled superannuation funds – where uniform rules apply to all members – SMSFs provide a personalised solution designed to meet specific member needs.

The simplified structure of SMSFs, which requires only a single tax return, streamlines tax administration. Trustees can use this structure to strategically allocate fund earnings, particularly benefiting retired members who may be eligible for tax exemptions. In this way, SMSFs combine control, customisation and tax efficiency, positioning them as a powerful vehicle for wealth creation and retirement planning.

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Notes:
[1] APRA Superannuation Statistics, December 2024
[2] ATO, Quarterly Statistical Report, December 2024
[3]  SMSF Association