SMSFs and Tax

Tax returns and tax concessions

Tax and SMSFs

Like any super fund, the income and investment returns of an SMSF are only taxed at the 15% concessional tax rate. And when the income is used to provide a pension stream, there is no tax at all. However, these concessions are available only to funds that comply with the ATO’s requirements for SMSFs.

How are capital gains taxed in a super fund?

An SMSF capital gain is basically any profit an SMSF makes from selling an asset. It’s classed as income and taxed as such. Similarly, any loss made from selling an asset is called a capital loss. Both need to be included in the 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%, then capital gains are also subject to a 15% tax.

But there are two additional, and very handy rules to remember, which apply to any super fund.

If an asset has been held for more than 12 months before it is sold, its capital gain may be eligible for a tax discount of 33%. That means, only two-thirds of the capital gain will be taxed, and at a 10% rate.
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 payout.

Since the tax rules of SMSFs can be complex, and there are penalties for non-compliance, it is often wise to get a professional SMSF accountant to manage this part of an SMSF’s administration.

Can I do my own SMSF tax return?

Yes, you can prepare your own SMSF tax return, but to make sure you’re completing it accurately, you will need to know all the rules and regulations. It is generally recommended that complex SMSFs hire a specialist self-managed super fund accountant – not only for the expertise but also to save the trustee’s time since keeping abreast of reporting obligations and doing the paperwork can be very time-consuming.

Unlike personal tax, the ATO does not send out a tax assessment, so calculating the correct tax is up to the person preparing the return. What’s more, the return is not simply a tax return, but a more comprehensive report on all the SMSF’s transactions and benefit payments.

What does an SMSF accountant do?

An SMSF accountant can take on a range of tasks including:

Assisting in setting up the SMSF’s accounts and structure
Preparing periodical statements and accounts
Drafting payment statements for members receiving a benefit
Assembling documentation, for the annual audit and liaising with the auditor
Completing the annual SMSF return including tax return and financial information

If the accountant is also a licensed financial advisor, they may also provide investment advice to the trustees.

It must be remembered that the accountant cannot also be the SMSF’s auditor.

Preparation checklist

The following checklist provides a guide for the most common things to remember when preparing the SMSF annual return:

Collate all end-of-financial-year bank statements
Gather all Financial Year Summaries for securities investments, managed funds, shareholdings, etc, from brokers, fund managers, and the like
Arrange for annual valuations of tangible assets such as property and collectables
Collate all income and expense accounts, including rental statements for any investment properties
Draft compliance statements confirming that property and/or collectables are not being used by members in contravention of SMSF rules
Collate documentation confirming the SMSF’s ownership of each asset, including photos of collectables to confirm their existence
Obtain ASIC Certificate extracts to confirm that SMSF trustees have no management control in any private companies that the SMSF has invested in
Gather any dividend or distribution statements from securities, private companies, etc
Collate all documentation surrounding any sale or purchase of assets by the SMSF, including titles and deeds, and the parties to the transactions
Obtain the auditor’s annual report
Document all benefit payments that were made to members as a pension
Detail any rollovers into the fund
Include confirmation of any life insurance details including a statement that it has been considered for all members

Remember, all accounts, statements, invoices, and other source documents must be kept for at least five years.

How much does an SMSF tax return cost?

The cost of preparing the SMSF annual return is usually part of an SMSF accountant’s overall fee. Naturally, this will depend on the complexity of the fund, and how much work the trustees are willing to put in themselves.

In general, fees for the basic accounting (including the returns) of simple SMSF’s are upwards of $1,000 per year, and can typically exceed $4,500 for more complex SMSFs.

Accounting fees are just some of the overall SMSF costs that are incurred each year.