How Does Tax Work in an SMSF?
An SMSF's income is generally taxed at a concessional rate of 15%, reducing to an effective 10% on capital gains from assets held longer than 12 months, and can be tax-free on income supporting pensions in retirement phase, up to the member's Transfer Balance Cap. Alongside the annual SMSF Annual Return, funds are often required to pay PAYG instalments throughout the year, either quarterly or annually, based on the fund's prior year tax position.
What tax rate does an SMSF pay?
Superannuation income in an SMSF is generally taxed at a concessional rate of 15%. Income supporting a pension in retirement phase is generally exempt from this tax, up to the member's Transfer Balance Cap, which is one of the reasons the Transfer Balance Cap matters so much when starting a pension. Income from a non-arm's length arrangement is taxed very differently, at the top marginal rate of 45% rather than the concessional rate, which makes getting related party dealings right a genuine compliance priority.
How is capital gains tax calculated for an SMSF?
Capital gains are included in the fund's assessable income and taxed at the same rates as other income. Where an asset has been held for at least 12 months, a one-third discount applies to the gain, reducing the effective tax rate on that gain to 10%. Assets held for less than 12 months don't receive this discount and are taxed at the full concessional rate.
What are PAYG instalments and does my SMSF need to pay them?
PAYG instalments are prepayments toward the fund's expected tax liability for the year, rather than paying the full amount in one lump sum after lodgement. The ATO determines whether an SMSF needs to pay instalments, and how often, based on the prior year tax position, this isn't something a Trustee opts into or out of.
How often are SMSF PAYG instalments paid?
Where instalments apply, the ATO will notify the fund of either a quarterly or an annual payment cycle. Quarterly instalments are typically due 28 October, 28 February, 28 April and 28 July, while an annual instalment is typically due 21 October. If the prior year tax is less than $8,000, the Trustee can elect in the first quarter of the financial year to pay annually instead of quarterly, this preserves the cashflow of the SMSF.
How are PAYG instalments determined and reconciled with the SMSF Annual Return?
PAYG instalment obligations are generally established after a fund's SMSF’s Annual Return has been lodged and assessed, not upfront. The ATO uses the tax result from that assessed return to determine whether the fund needs to start paying instalments, and at what amount, for the following year. This is why a newly established SMSF, or one without a prior year's tax result on record, often won't have any PAYG instalment obligation in its first year.
The total instalments paid throughout the year are credited against the fund's actual assessed tax liability for that year. If the instalments paid exceed the actual liability, the excess is refunded to the fund. If the instalments paid fall short of the actual liability, the shortfall becomes payable on assessment. The instalments are a prepayment reconciled at year end, not a separate, final tax amount in their own right.
Does tax treatment differ between accumulation phase and pension phase?
Yes. Income supporting members in retirement phase is generally exempt from fund tax up to the Transfer Balance Cap, while income supporting accumulation phase members is taxed at the standard concessional rate. Where a fund has both accumulation and retirement phase members and hasn't segregated assets for pension purposes, an actuarial certificate is generally needed to determine the exempt proportion of the fund's income.
Frequently asked questions
Do SMSF members pay tax on their pension payments?
Whether the member pays personal tax on the payment depends on their age and the tax components of their benefit, which is a separate question to how the SMSF itself is taxed. If the member being paid a pension is 60 years of age or older, they do not pay tax on the pension payments they receive.
What is Non-Arm's Length Income (NALI) and why does it matter?
Non-Arm's Length Income is income from an arrangement that isn't conducted on a genuine commercial, arm's length basis, for example, a related party transaction priced below market value. NALI is taxed at the top marginal rate of 45%, rather than the fund's usual concessional rate, making it one of the more serious tax risks in SMSF compliance.
Why did my SMSF suddenly start getting PAYG instalment notices?
PAYG instalments are generally triggered by the ATO after assessing a prior year's SMSF Annual Return. If your fund didn't have instalments before, a change in the SMSF's tax result on that assessed return is usually why instalments have now started.
Does my SMSF need to register for GST?
Mandatory registration is only required if the fund's turnover exceeds the GST registration threshold, which is uncommon for most SMSFs unless the fund holds a large commercial property. SMSF’s are able to claim Reduced Input Tax Credits on certain expenses so it may be beneficial to voluntarily register for GST
Not sure how PAYG instalments or capital gains apply to your SMSF? Contact Lifetime SMSF on 1300 031 943 or visit lifetimesmsf.com.au.
This information is general and factual in nature. It is not financial product advice, legal advice or tax advice. Lifetime SMSF Pty Ltd is not licensed to provide financial product advice under the Corporations Act 2001. If you require personal advice, consult an appropriately licensed or authorised financial adviser.