Managing capital gains tax in your SMSF

When you invest, you make capital gains when asset values increase and capital losses when their values fall.

While the object of investing is to build your capital, the downside of making significant capital gains is that you can end up with a tax liability when the assets are sold.

When it comes to your SMSF, the right strategies can help you effectively manage capital gains tax (CGT) and reduce its impact on your super balance.

What are capital gains and CGT?

Before discussing strategies, it’s worth brushing up on the basics of how CGT works.

CGT is part of the normal income tax of your SMSF (or of your personal income tax for gains you make outside super), not a separate tax. Under tax law, whenever you sell an asset and make a capital gain, you’re generally required to pay tax on the capital gain since purchasing the asset.

Keep in mind that a CGT event only occurs when an asset is sold or ‘realised’.

For example, if super fund A bought asset X three years ago for $100,000 but sells it for $120,000, the realised capital gain made on that asset is $20,000. Conversely, if the fund sells asset X for $80,000, it suffers a realised capital loss of $20,000.

A realised capital gain can be offset against any realised capital losses. Your net tax position is then used to calculate the amount of CGT payable. Generally, there is no time limit on how long a capital loss can be held to offset future capital gains.

The ATO defines a net capital gain as:

• Total capital gains for the year

less

• Total capital losses for that year and any unapplied capital losses from earlier years

less

• CGT discount and any other concessions (more on this below).

Division 296 and CGT cost base reset