Tax Obligations To Know About Before Investing In SMSF


A large number of Australians invest in superannuation funds because it not only serves as a key source of money after retirement but also reduces a significant amount of tax. You may choose superannuation in a traditional super fund or consider creating a self-managed superannuation fund. 

However, if you want to get the best returns from your superannuation, it will be essential to have the correct fee structure and appropriate investment strategy. Top-rated accountants Perth can help you with that. This blog will guide you through the different tax obligations you should know before making investments in SMSF.

What Is An SMSF?

SMSF stands for ‘self-managed superannuation fund.’ So, as the name suggests, it is a private trust built and operated to offer retirement benefits to the members. If you create an SMSF and become the trustee, you will have to fulfil the following duties.

  • First of all, make sure that the fund complies with all tax and super obligations.
  • In addition, it will be your responsibility to make investment decisions. SMSFs are controlled by the ATO (Australian Tax Office) and cannot enjoy the same regulatory oversight as other Australian super funds. 
  • If any investment theft or fraud occurs, APRA-controlled funds can apply for compensation to the Australian Government.
  • SMSFs are also kept outside of the Superannuation Complaints Tribunal. In this tribunal, disputes over various issues are resolved for free. 

Managing The SMSF

In an SMSF, you will have complete freedom to decide on what you should invest in and how you can grow your retirement savings. But, managing an SMSF is not so easy. 

  • Although there is a high chance of receiving good returns on your investments, you will get exposed to greater risk than what you would have encountered in a standard super fund as an SMSF member. This is why you should always consider both risks and benefits before investing in your self-managed super fund.
  • The ATO has set strict rules for managing the SMSF. For example, you cannot use your SMSF to have early access to your super fund, buy decorative artwork for your house or purchase a holiday home. As a member, you can only access the SMSF money when you reach the age after retirement.

A Few Statistics To Know

Despite so many strict obligations, many Australians have been investing in SMSFs, and the number is increasing every year. The following statistics will give a clearer picture.

  • Of all superannuation assets in Australia currently, SMSFs make up about 29%.
  • In the last 10 years, over one million investors have switched to investing in SMSF.
  • In the market that is currently worth about $700 billion, nearly 600000 funds are operating. The number of Australians choosing SMSFs is more than ever.

So you can see how popular SMSF investment has become, which means getting impressive returns is also not impossible. Only, you have to keep in mind the important tax obligations, which we will discuss now.

The Ground Rules On Tax

For tax obligations, an SMSF is treated the same way as an industry, retail, and corporate funds. However, unlike other mentioned organisations, you will have much greater control of taxation in an SMSF. As an SMSF trustee has more power and flexibility over the SMSF investment decisions, they can determine when an asset is sold.

Currently, the rate of income tax within a superannuation fund (that also includes an SMSF) is 15%. However, if the income is generated by the assets that support an income stream like pension, you will not have to pay a tax on that income within the fund.

As per ATO regulations, the following income streams are assessed for a complying SMSF.

  • Interests, rent, and dividends.
  • Personal and employer deductible contributions, and
  • Net capital gains.

For taxation purposes, you may hire a professional SMSF accountant.

What Is Non-Arm’s Length Income?

Other investments and activities are also defined by the ATO, which fall outside the tax rate of 15%. These activities and investments include non-arm’s length income for which the marginal tax rate is the highest. Non-arm’s length income consists of the following.

  • Income received from an investment or a scheme where the parties are not closely dealing with each other.
  • Income, the amount of which is more than the amount expected to receive if the involved parties have been working together at arm’s length
  • Income received by an SMSF as a discretionary trust beneficiary

There are other types of SMSF income, to which different tax rates apply. One such income is the contributions made where the SMSF does not have the TFN (Tax File Number). These contributions are termed as ‘no-TFN contributions’ and taxed at the highest marginal tax rate.

How Can You Avoid Tax Penalties?

The simplest way to avoid tax penalties is to remain compliant with the ATO rule. The rule says that you cannot lend money to any other trustee, relatives of the trustee, or yourself. If such a thing happens, your SMSF will be considered non-compliant, and you have to pay hefty penalties.

What Are In-House Assets Obligations?

Regarding your SMSF assets, you have to comply with the following obligations.

  • You cannot use those assets for personal purposes. Therefore, if you want to buy a holiday house for your personal use, you must drop that plan. However, the ATO will allow it if your fund purchases that home and gives rent to non-related parties.
  • For your in-house assets, you can invest a maximum of 5% of your SMSF. The in-house assets rules are indeed complicated, and we recommend taking advice from professionals.

The Bottom Line

Remaining compliant with the taxation laws is the most important thing to do. But the Australian laws related to SMSFs are hard to understand, and so you should make sure that your accountant, financial adviser, or financial planner is qualified enough. An experienced and skilled professional can only give you the best advice on investing in your SMSF.

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