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In the process of buying and selling assets, self-managed superannuation funds will have capital gains and capital losses.
A capital gain is when you sell an asset for a profit.
For example, if SMSF A bought asset X three years ago for $100,000 but sells it for $120,000, the capital gain made on that asset is $20,000.
Conversely, if SMSF A were to sell asset X for $80,000, the fund would experience a capital loss of $20,000.
The tax imposed on that gain depends on whether an SMSF is in accumulation or retirement phase and whether there are members in each of those phases.
As income earned in retirement phase is tax free, if the asset is sold in retirement phase the fund will have no tax liability on the capital gain.
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Accumulation phase capital gains tax rules
An SMSF wholly in accumulation phase will pay tax on the fund’s annual net capital gain. If an asset is held for more than 12 months, any capital gain is eligible for a discount of one third.
The net gain is treated as income for tax purposes so it will be taxed at the same rate as other income in the fund – i.e. 15%.
To be eligible for the concessional tax rate of 15% on all income earned a fund must be a complying fund that adheres to all the legal requirements of an SMSF. If it is found to be non-complying, tax is levied at 45%.
SMSFs and capital gains tax losses
Sales of assets in accumulation phase that result in capital losses can only be used to offset capital gains and cannot be used to offset any other income. However, a capital loss can be carried forward to future years in accumulation phase and used to offset capital gains then.
The Australian Taxation Office (ATO) says there is no time limit on how long a capital loss can be held for to offset future capital gains.
Capital gains tax strategies for SMSFs
The obvious strategy for an SMSF expected to make a capital gain on the sale of the asset is to defer the sale of that asset until they and all other members in the fund are in retirement phase.
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2. Using a gain to offset a loss
Capital losses from the sale of assets in an SMSF can be held until the fund experiences a capital gain. If an SMSF is expecting a capital loss in a particular year – for example, they finally decide to sell a poorly performing asset – it would be a good idea to realise a capital gain in the same income year.
This is especially the case if the trustee is getting close to retirement, as a carry forward capital loss is not useful if the fund moves wholly from accumulation phase to being wholly in retirement phase.
Transitional CGT relief regarding the transfer balance cap and transition to retirement pensions
Transitional CGT relief was temporary relief provided to SMSFs in certain circumstances. It was introduced to help SMSFs comply with two changes that were introduced on 1 July 2017.
On 1 July 2017 the transfer balance cap was introduced. The transfer balance cap puts a limit on the amount of superannuation that can be transferred to retirement phase. That cap is currently $1.6 million but will be indexed. (See our guide on the transfer balance cap here: Definitive guide to the $1.6 million transfer balance cap).
The second change was the requirement that income earned on assets supporting a transition to retirement pension (TRIS pension) in accumulation phase be taxed at the same rate as assets in accumulation phase. Previously they were taxed at the same rate as assets in retirement phase i.e. a 0% tax rate.
The transitional CGT relief allowed the value of assets moved from retirement phase into accumulation phase prior to the introduction of the changes be considered at the value of transfer, rather than their value at their initial purchase, for capital gains purposes.
“You are deemed to have sold and repurchased the asset for market value on the day it ceased to be a segregated current pension asset,” the ATO says.
Eligibility for transitional CGT relief
CGT relief was available to SMSFs in very specific circumstances and SMSFs that used them needed to be aware they could be subjected to the general anti-avoidance rules if they did not use the provisions for their intended purpose.
To be eligible for the relief, an SMSF needed to have held the asset throughout the entire pre-commencement period (9 November 2016 until 30 June 2017) and have been a complying superannuation fund from 9 November until the date the relief was applied.
An SMSF’s eligibility for the relief, and how it was applied, depended on how they were calculating eligible current pension income (ECPI) at the start of the pre-commencement period, which was the period from 9 November 2016 to 30 June 2017.
If an SMSF was 100% in pension phase during the pre-commencement period or they were using the segregated method to calculate ECPI during the pre-commencement period they were eligible for the relief. If the asset transferred was both supporting a pension and somebody in accumulation phase, then the relief also needed to be applied proportionately.
SMSFs had until the extended deadline of 30 June 2018 to lodge their tax return for the 2016/17 financial year and make an election for CGT relief.
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