How SMSF Tax Works in Australia

Self-Managed Superannuation Funds (SMSFs) are taxed differently from standard super funds. As a trustee, you are responsible for ensuring your SMSF meets its tax obligations each year. The fund lodges its own annual return and pays tax at concessional rates designed to encourage retirement savings.

SMSFs generally pay tax at 15% on concessional contributions received and on investment earnings during the accumulation phase. This is significantly lower than the top marginal tax rate of 45%, making super a highly tax-effective savings vehicle. The fund's taxable income includes employer contributions, salary sacrifice amounts, personal deductible contributions, rent, dividends, interest, and capital gains.

The ATO requires SMSFs to lodge a Self-Managed Superannuation Fund Annual Return each year. This return covers both income tax and regulatory compliance. You can use our superannuation calculator to estimate how your contributions and earnings grow within the super system over time.

SMSF Tax Rates for FY 2025-26

Different types of SMSF income attract different tax rates. Knowing which rate applies to each income stream is essential for accurate tax planning and avoiding costly mistakes.

Contributions Tax in Your SMSF

Concessional contributions entering your SMSF are taxed at 15%. This includes the Super Guarantee your employer pays, any salary sacrifice amounts you arrange, and personal contributions you claim as a tax deduction. The concessional cap for FY 2025-26 is $30,000.

If your combined income (including reportable super contributions) exceeds $250,000, you pay an additional 15% Division 293 tax on concessional contributions. This effectively brings the contributions tax to 30% for high-income earners. The Division 293 threshold has remained at $250,000 since its introduction in 2012-13.

Non-concessional (after-tax) contributions enter your SMSF tax-free. The cap is $120,000 per year, or up to $360,000 over three years using the bring-forward rule. Your total super balance must be below $1.9 million at 30 June to be eligible for non-concessional contributions. Use our income tax calculator to see how salary sacrificing affects your take-home pay.

SMSF Capital Gains Tax

When your SMSF sells an asset that has increased in value, the fund pays capital gains tax on the profit. The rate depends on how long the asset was held. Assets held for less than 12 months are taxed at the standard 15% rate with no discount. Assets held for more than 12 months qualify for a 1/3 CGT discount, reducing the effective tax rate to 10%.

Capital losses within your SMSF can only be offset against capital gains, not against other income like contributions or dividends. Losses can be carried forward to future years. If your SMSF transitions from accumulation to pension phase, you may trigger CGT on the deemed disposal of assets, though transitional CGT relief provisions can help defer this tax.

The 50% CGT discount available to individual investors is not available to SMSFs. Instead, super funds receive a 33.3% (1/3) discount on eligible capital gains. This applies to assets acquired and held for at least 12 months, with the discount calculated after applying any applicable cost base indexation.

Pension Phase Tax Exemption

Once your SMSF starts paying a pension to a member, the income generated by assets supporting that pension becomes tax-free. This is known as Exempt Current Pension Income (ECPI). It is one of the most significant tax advantages of moving from accumulation to pension phase.

If your SMSF has both accumulation and pension members, you need to apportion income between the two phases. Only the portion of income related to pension assets is exempt. The ATO allows several methods for calculating ECPI, including the segregated method and the proportionate method. The segregated method is generally simpler if pension assets are clearly separated.

Minimum pension drawdown rates apply once a pension starts. For FY 2025-26, the temporary 50% reduction in minimum drawdown rates that was in place during COVID has now ended. Standard minimum rates apply again, ranging from 4% for members under 65 to 14% for members aged 95 and over. Check our age pension calculator to estimate your retirement income.

Non-Arm's Length Income and Other Penalty Rates

The ATO applies strict rules to Non-Arm's Length Income (NALI) to prevent SMSFs from gaining inappropriate tax advantages. If your SMSF acquires an asset or derives income from a non-commercial arrangement, the income may be taxed at the top marginal rate of 45% rather than the concessional 15% rate.

Common NALI traps include: purchasing assets from a related party at below-market prices, borrowing on non-commercial terms, receiving rent below market rates from a related tenant, and limited recourse borrowing arrangements (LRBAs) structured on non-commercial terms. The ATO has increasingly focused on NALI in recent years, with significant penalties for non-compliance.

Non-Arm's Length Expenditure (NALE) rules were expanded from 1 July 2018. If your SMSF incurs expenditure that is less than what would normally be charged in an arm's length dealing, the related income may be treated as NALI. This particularly affects expenses like accounting fees, trustee services, and property management.

How to Calculate Your SMSF Tax

Calculating your SMSF tax liability involves several steps. First, total all assessable income including concessional contributions, investment earnings, and net capital gains. Deduct allowable expenses such as administration fees, accounting costs, insurance premiums within the fund, and interest on borrowings.

Next, apply the appropriate tax rate to each income component. Concessional contributions are taxed at 15% (or 30% if Division 293 applies). Investment income is taxed at 15% in accumulation phase. Capital gains on assets held over 12 months are taxed at 10% after the 1/3 discount. Pension phase income is tax-free.

Finally, subtract any franking credits received from Australian shares. These credits can offset your SMSF's tax liability or generate a refund if the fund's tax rate is lower than the company tax rate. Our Medicare levy guide has useful information about how levies and offsets interact with your overall tax position.

SMSF Tax Planning Strategies for FY 2025-26

Effective tax planning can significantly reduce your SMSF's annual tax bill. One of the most powerful strategies is ensuring your fund maximises the pension phase exemption by converting accumulation balances to pension phase when members meet preservation age and satisfy a condition of release.

Timing asset sales carefully is another key strategy. Selling assets that have been held for more than 12 months attracts the 1/3 CGT discount. Selling assets in years when the fund has capital losses can offset gains. Consider deferring large capital gains to a year when the fund transitions to pension phase, as transitional CGT relief may apply.

Making the most of the concessional contributions cap is also important. Contributing up to $30,000 per year ($30,000 per member reduces taxable income outside super while building retirement savings inside the concessional tax environment. For those with low super balances, unused concessional cap amounts from previous years can be carried forward under the catch-up rules, available for balances under $500,000.

Frequently Asked Questions

What is the SMSF tax rate for FY 2025-26?

The standard SMSF tax rate is 15% on contributions and investment earnings during accumulation phase. Capital gains on assets held over 12 months are taxed at 10%. Pension phase income is tax-free at 0%. High-income earners with combined income over $250,000 pay an additional 15% Division 293 tax.

Do SMSFs pay capital gains tax when selling property?

Yes, SMSFs pay CGT when selling property. If held for more than 12 months, the effective rate is 10% after the 1/3 CGT discount. If held for less than 12 months, the full 15% rate applies. Property in pension phase may qualify for the ECPI exemption on the capital gain.

How is SMSF income taxed in pension phase?

Income from assets supporting a pension is tax-free in pension phase. This is called Exempt Current Pension Income (ECPI). You must calculate the exempt portion each year based on the proportion of fund assets supporting pension liabilities.

What is Division 293 tax and who pays it?

Division 293 tax is an additional 15% tax on concessional super contributions for high-income earners. It applies when your combined income (taxable income plus reportable super contributions) exceeds $250,000. This brings the total contributions tax to 30% for affected members.

Can an SMSF claim franking credits?

Yes, SMSFs can claim franking credits on dividends received from Australian shares. These credits offset the fund's tax liability. In accumulation phase, the 15% tax rate means the fund receives a partial refund of excess franking credits. In pension phase, franking credits are fully refundable since the fund pays 0% tax.

What happens if my SMSF exceeds contribution caps?

Excess concessional contributions are included in your personal assessable income and taxed at your marginal rate, plus an interest charge. You can elect to release up to 85% of the excess from your super fund. Excess non-concessional contributions must be withdrawn or face penalty tax of 45%.