Capital gains are profits made on the sale of capital assets, such as property or shares. Capital gains (including those made by SMSFs) are potentially liable for capital gains tax (CGT).
What are the CGT rules for SMSFs?
- Assets that are in the accumulation phase are subject to CGT when they are sold
- Assets in the retirement phase are exempt from CGT when they are sold
The assessable income for your SMSF must therefore include any net capital gains made on the sale of capital assets, except assets that are segregated for the purpose of providing a super pension income stream.
Any net capital gain must be added to your SMSF’s income in the financial year that it occurs. Superannuation income is generally taxed at the concessional super rate of 15%.
Do you receive any tax benefit from a capital loss?
Capital losses can only be offset against capital gains, they cannot be offset against any other fund income. Therefore your fund needs to make a capital gain to be able to offset a capital loss.
If your SMSF doesn’t have a capital gain in the year you make a capital loss (or if your capital loss exceeds any capital gain that your fund has made), then the capital loss (or the excess over your capital gain) can be carried forward to be offset against a capital gain in a future year.
How is CGT calculated?
The net capital gain for an SMSF asset sale is calculated as follows:
net capital gain = the total capital gains for the year
MINUS (the total capital losses for the year PLUS any unapplied capital losses)
MINUS the CGT discount.
It’s important to understand each of the components of the above formula:
- Your capital gain or loss on the sale of an SMSF asset is calculated by subtracting the asset’s cost base from its selling price. An asset’s cost base includes its purchase price, as well as certain other costs associated with holding or disposing of it. For example, holding costs could include rates for an investment property owned by your SMSF. Disposal costs could include real estate agent commission when selling the property, or brokerage costs when selling shares.
- Unapplied capital losses are any capital losses that your fund may have incurred in previous years that have not yet been offset against capital gains.
- If your SMSF disposes of an asset that has been held for at least 12 months, you’re eligible for a CGT discount of 33.33%. This means that the effective rate of tax on this type of capital gain is 10%, because SMSF income is usually taxed at 15%, and this amount is reduced by one-third (i.e. 33.33%) for capital gain income.
Jeff has his own SMSF and is in the accumulation phase. He has made capital gains of $10,000 on the sale of SMSF shares this year. The shares were held by his fund for longer than 12 months, so his fund is eligible for the CGT discount. The fund also has an unapplied capital loss of $3,000 that can be offset against this year’s capital gain.
The net capital gain for Jeff’s SMSF is calculated as follows:
Net capital gain = $10,000 – $3,000 – $3,333 (i.e. 33.33% of the capital gain)
This net capital gain amount will be added to the fund’s income and taxed at 15%.
Bob and Cynthia have their own two-member SMSF and they are in the retirement phase. They make a capital gain on the sale of an SMSF investment property of $100,000. Because they are in the retirement phase, this SMSF capital gain is exempt from CGT.
What are some CGT strategies that SMSFs could use?
There can be significant tax advantages to delaying any SMSF asset sales until your members reach the retirement phase. This allows you to take advantage of the CGT exemption that is available for assets in this phase.
In addition, you should ensure that any SMSF asset in the accumulation phase that you sell has been held for at least 12 months to be eligible for the CGT discount.
If you incur any capital losses from the sale of SMSF assets, you should also ensure that you offset those losses against any future capital gains made. Doing this will reduce your overall SMSF tax obligation.
What is transitional CGT relief and how does it work?
Transitional CGT relief is a temporary arrangement that was put in place to help trustees of super funds (including SMSFs) to comply with two reforms that were introduced on 1 July 2017.
The first of these reforms was the introduction of a $1.6 million transfer balance cap. This is the limit of assets that can be held in the CGT-exempt superannuation retirement phase. The introduction of this cap forced some trustees to transfer member assets back into the accumulation phase if they exceeded the $1.6 million retirement phase cap.
The transitional CGT relief arrangement allows assets that were transferred for this reason to have their cost bases readjusted to reflect their market value when they were transferred. This should reduce the CGT obligation if they are subsequently sold in the accumulation phase, because the cost base is likely to be higher and the capital gain therefore smaller.
The second of the super reforms that was introduced on 1 July 2017 was that earnings on assets not in the retirement phase that supported transition-to-retirement income streams (TRIS) became taxable. SMSFs in this position are also able to have the cost bases of these assets readjusted to reflect their market value on 1 July 2017. Again, this should reduce any future CGT obligation if these assets are subsequently sold while still in the accumulation phase.
CGT obligations on the sale of SMSF assets can involve complex calculations. It’s best to seek professional accounting advice based on your fund’s specific circumstances.
The information contained in this article is general in nature.