Q: If I purchased a rental property in my SMSF for say $300,000 five years ago and the house is now valued at $400,000 in the SMSF what will be the capital base for the calculation of future capital gains tax (CGT) if I sell the flat? Will it be the original $300,000 or the $400,000?
A: We are not permitted to provide a specific response regarding the CGT calculation in your question, but we can however offer some general comments which should help you answer your question.
Calculating the cost base
You refer to ‘capital base’ in your question, but we assume that you mean ‘cost base’. The cost base may not simply be the purchase price but can also include the cost of any capital improvements to the asset, and certain other costs incurred since owning the property. Generally speaking, the capital gain (or loss) is the difference between the cost base and the sale/transfer price.
The Australian Tax Office has produced a useful document on capital gains tax that covers individuals and superannuation funds. Although the publication is designed to help taxpayers complete the 2017/2018 year tax return, the document also provides some excellent explanations on how to calculate an asset’s cost base, how to work out the capital gain or loss, and how to calculate the net capital gain/loss if your fund has bought or sold more than one asset. You can find a copy of the ATO’s Guide to capital gains tax 2018 here. I have included three explanations (‘What is the cost base?’, ‘capital gain’ ‘capital loss’ and ‘capital proceeds’) from an earlier ATO CGT publication, at the end of this response.
A registered tax agent, usually an accountant, can help you with your specific CGT calculations.
Tax-exempt earnings in retirement phase
If your super account is in retirement phase, that is, you’re receiving a retirement phase super pension from your SMSF account, then no tax is payable on earnings from fund assets financing the SMSF pension. The tax-exempt treatment of fund earnings financing a pension also includes any capital gains (which means the capital gains in retirement phase are exempt from tax).
Taxable earnings in accumulation phase
If you have not yet started a super pension in retirement phase, that is, your super account is in accumulation phase, then earnings tax is payable on fund earnings, including any capital gains. If you have held the fund asset for less than 12 months when you sell, then 15% earnings tax is payable on any capital gain. If you have held the fund asset for 12 months or more when you sell, then the tax on capital gains is discounted by 33.3%, which means you pay an effective rate of tax of 10% on capital gains.
For example, say a SMSF purchased an asset for $300,000 (including buying costs) several years ago, and then sold the asset for net proceeds of $400,000 (after selling costs have been deducted). The SMSF has made a capital gain of $100,000 which is counted as fund earnings. Due the length of time the SMSF held the asset the capital gain is eligible for the CGT discount, which means the SMSF pays $10,000 CGT on the $100,000 capital gain.
ATO’s explanation of some key terms (sourced from an earlier CGT guide)
The cost base of an asset is generally what it costs you. It is made up of five elements:
- money you paid or property you gave for the asset
- incidental costs of acquiring or selling it (for example, brokerage and stamp duty)
- costs of owning it (generally this will not apply to shares or units because you will usually have claimed or be entitled to claim these costs as tax deductions)
- costs associated with increasing or preserving its value or installing or moving it, and
- what it has cost you to preserve or defend your title or rights to it, for example, if you paid a call on shares.
You may need to reduce the cost base for a share or unit by the amount of any non-assessable payment you receive from the company or fund.
You may make a capital gain from a CGT event such as the sale of an asset. Generally, your capital gain is the difference between your asset’s cost base (what you paid for it) and your capital proceeds (what you received for it). You can also make a capital gain if a managed fund distributes an amount described as a capital gain to you.
Under the trust provisions, you may make a capital gain if you are:
- specifically entitled to an amount of a capital gain made by the trust, and/or
- there is an amount of capital gain included in the income of the trust to which no entity is specifically entitled and you are presently entitled to a share of that income.
Generally, you may make a capital loss as a result of a CGT event if you received less capital proceeds for an asset than its reduced cost base (what you paid for it).
Capital proceeds is the term used to describe the amount of money or the value of any property you receive or are entitled to receive as a result of a CGT event. For shares or units, capital proceeds may be:
- the amount you receive from the purchaser
- the value of shares (or units) you receive on a demerger
- the value of shares (or units) and the amount of cash you receive on a merger or takeover, or
- their market value if you give them away.
For more information…
For more information on CGT and super, see the following SuperGuide articles:
- SMSFs: Selling a property asset and CGT
- Non-cash contributions, CGT and contributions caps
- Managing capital gains tax with super contributions
- Capital gains: Reducing income tax via super contributions
- Super for beginners, part 17: Four must-knows about super’s tax rules
For more information on property investing and super, see the following SuperGuide articles: