Key takeaways

  • Complying SMSFs are generally taxed at a concessional rate of 15% on their assessable income.
  • Capital gains on Assets held longer than 12 months may receive a discount, and assets supporting a retirement-phase pension may be tax-exempt.
  • Non-arm’s length income and non-arm’s length expenses can attract penalty tax rates.
  • Contributions can be concessional or non-concessional, with separate caps and tax treatment.
  • This article is general education only. Australians should consider speaking with a registered tax agent, Accountant or licensed financial adviser before acting.

Superannuation in Australia is generally taxed concessionally, and self-managed super funds (SMSFs) sit within that framework. The Australian Taxation Office (ATO) regulates SMSFs and administers the relevant tax laws.

SMSF tax rules can look complicated because they involve several different layers: tax on contributions, tax on fund Earnings, tax on capital gains, tax in pension phase, and special rules where transactions are not on an arm’s length basis. This article walks through each of these in clear language, with a focus on the rules most relevant to Australian trustees.

This is general information only. It is not personal tax or financial advice, and tax rules can change.

The concessional 15% tax rate

A complying SMSF is generally taxed at a flat rate of 15% on its assessable income. This is significantly lower than most personal marginal tax rates, which is one reason the super system is described as providing concessional tax treatment.

Common types of SMSF assessable income include:

  • Concessional contributions (such as employer Super Guarantee and salary sacrifice).
  • Investment income, including interest, dividends and rental income.
  • Realised capital gains on the sale of assets.

Some income, such as exempt current pension income (ECPI) on assets supporting a retirement-phase pension, may be exempt from tax. The mechanics of ECPI are complex and most SMSFs use an accountant or actuarial certificate where required.

Tax on contributions

Contributions to an SMSF generally fall into two main categories.

Concessional contributions are made from before-tax money. They include:

  • Employer Super Guarantee contributions.
  • Salary sacrifice contributions.
  • Personal contributions for which a Tax deduction is claimed.

Concessional contributions count towards the concessional contributions cap set by the ATO. They are taxed at 15% inside the fund.

Non-concessional contributions are made from after-tax money and are not generally taxed inside the fund. They count towards the non-concessional contributions cap.

Going over the caps can lead to additional tax for the member and other consequences. The caps can change each year. Trustees should check the latest caps on the ATO’s website or with a registered tax agent.

In addition, individuals on higher incomes may be subject to Division 293 tax, an additional 15% tax on certain concessional contributions where their combined income and contributions exceed a threshold.

Tax on investment earnings

Investment earnings inside an SMSF are generally taxed at 15%. These can include:

  • Interest on cash and term deposits.
  • Dividends from shares.
  • Rental income from property.
  • Distributions from managed funds and ETFs.

Franking credits attached to Australian share dividends can reduce the tax payable by the fund. In some cases, an SMSF can receive a refund of excess franking credits, although the rules are detailed and have been subject to political debate over the years.

Capital Gains Tax in an SMSF

If an SMSF sells an asset for more than its cost base, a Capital Gain may arise. The general rules include:

  • Net capital gains are added to assessable income and taxed at 15% in accumulation phase.
  • If the asset has been held for more than 12 months, the SMSF can apply a one-third discount, effectively reducing the tax rate on that gain to 10% in accumulation phase.
  • Capital losses can be used to offset capital gains, but they generally cannot reduce other types of income.

In the retirement (pension) phase, capital gains on assets supporting a retirement-phase income stream may be wholly or partly exempt from tax, depending on how the fund’s assets are allocated.

Pension phase and retirement-phase income streams

When a member meets a condition of release and starts a retirement-phase income stream (such as an account-based pension), the assets supporting that pension may be tax-exempt up to the member’s transfer balance cap.

The transfer balance cap is the lifetime limit on how much super an individual can move into retirement-phase income streams. It is indexed periodically.

Income on assets supporting:

  • Accumulation accounts is taxed at 15%.
  • Retirement-phase income streams (within the transfer balance cap) is generally tax-exempt to the fund.

When members earn income above the transfer balance cap, excess amounts may be required to be transferred back to accumulation phase, where ordinary super tax rules apply.

Non-arm’s length income and non-arm’s length expenses

A particularly important area of SMSF tax is non-arm’s length income (NALI). NALI rules apply where an SMSF receives income from a transaction that is not on commercial, arm’s length terms — for example:

  • The fund acquires an asset from a related party for less than Market Value.
  • The fund earns income that is higher than would be expected on an arm’s length basis.
  • The fund incurs expenses below market rates in relation to its income.

NALI is taxed at the highest marginal tax rate (currently 45%), rather than 15%. The ATO has also published guidance on non-arm’s length expenses (NALE), which can taint income earned by the fund.

Trustees should ensure all transactions, including those with related parties, are documented and undertaken on commercial terms. Professional advice is often required.

Special tax rules: collectibles, Cryptocurrency and unusual assets

SMSF investments can extend to less common asset classes such as collectibles and cryptocurrency, but special rules apply:

  • Collectibles (such as artwork, jewellery and antiques) must be stored, insured and used in compliance with strict ATO rules. They cannot be displayed in a Trustee’s home.
  • Cryptocurrency is treated as a capital gains tax asset. Gains and losses are taxed accordingly.

These investments may sit within the fund’s investment strategy, but they bring additional administrative and compliance requirements.

The SMSF annual return

Each year, the SMSF must lodge an SMSF annual return with the ATO. The annual return:

  • Reports the fund’s tax position.
  • Reports member contributions and benefits.
  • Includes regulatory information.
  • Includes the supervisory levy payment.

Before lodgement, the fund must be audited by an approved SMSF auditor. The auditor checks both the financial position and compliance with super law. The auditor must be appointed at least 45 days before the annual return is due.

Practical example: a simple tax view of an SMSF

Imagine a fictional SMSF with two members in accumulation phase. Over the year, the fund:

  • Receives $30,000 in concessional contributions.
  • Earns $20,000 in dividends (with attached franking credits).
  • Earns $10,000 in interest.
  • Sells shares it has held for more than 12 months, realising a $9,000 capital gain.

The fund’s assessable income (before deductions) might include the contributions, dividends, interest and discounted capital gain. After applying deductions (such as expenses, insurance premiums and accounting fees) and franking credits, the fund’s tax Liability is calculated at 15%, with the discount applied to the long-term capital gain.

This is a simplified illustration only. Actual tax positions can be much more complex and are usually calculated by registered tax agents and SMSF accountants.

Tax on benefit payments

When members access their super, additional tax rules apply:

  • Lump sum payments to members 60 and over are generally tax-free if paid from a taxed source.
  • Lump sums to members under 60 may have taxed and untaxed components.
  • Pensions paid to members 60 and over are generally tax-free if paid from a taxed source.
  • Death benefits paid to dependants may be tax-free, while benefits paid to non-dependants may be taxable.

The treatment depends on factors such as the member’s age, the type of payment, the tax components of the benefit and the recipient.

Risks, costs and limitations

SMSF tax rules can be complex and trustees often rely on professional advisers. Common risks and considerations include:

  • NALI and NALE risks — small errors can attract a 45% tax rate.
  • Excess contributions tax — going over the contribution caps can be costly.
  • Pension phase strategy errors — incorrect transfer balance reporting can attract penalties.
  • Capital gains timing — selling assets near a member’s retirement may have very different tax outcomes.
  • Ongoing rule changes — SMSF tax law changes periodically, including caps and thresholds.