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Taxation of super funds

Superannuation tax rates

Section: 6.4

A complying superannuation fund's taxable income (assessable income less deductions) is taxed at 15% in most cases.

An exception applies where the fund receives a non-arm's length component of its taxable income, which is taxed at 45% instead. This component is any non-arm's length income less deductions attributable to that time. Non-arm's length income includes:

  • income derived from a scheme where the parties are not dealing with each other at arm's length, and the amount of income is greater than what it would have been had the parties been dealing at arm's length in relation to the scheme
  • non-arm's length dividends paid by a private company
  • distributions from a discretionary or non-fixed trust
  • distributions from a unit trust where the income was derived under a scheme where the parties were not dealing at arm's length and the amount of income is more than the amount that the superannuation fund would have received if they were dealing on an arm's length basis.

A non-complying superannuation fund is instead subject to 45% tax on its entire taxable income.

Applying franking credits to reduce tax

A complying superannuation fund can also use franking (imputation) credits received, as a result of the fund receiving franked dividends, to reduce its income tax liability.

Where a complying superannuation fund's franking credits exceed its income tax liability during an income year, the fund receives a cash refund equal to its excess franking credits (with the benefit of this refund applied by the fund across its membership on a fair and reasonable basis). In practice, this 'net refund' situation occurs in many SMSFs and some large superannuation wraps.

Taxation of super funds vs other investment structures

Table below provides a summary of the taxation of superannuation funds compared with other investment structures.

Legal structure Tax rate on income
Complying super funds
  • 15% in accumulation phase within complying super fund.
  • 0% in retirement phase within complying super fund.
  • 45% in non-complying funds.
Companies
  • 27.5% if company is a small business entity
  • 30% for other companies
  • Company tax rates are gradually reducing to 25% over time.
Individuals/partnership Individual or each partner's marginal rate of tax.
Discretionary trusts Where the trustee distributes all income to each entitled beneficiary, tax is payable on the beneficiary's total assessable income, including the trust distributions, at each beneficiary's marginal tax rate.

Last modified: Wednesday, July 24, 2019