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In the process of buying and selling assets, self-managed superannuation funds (SMSFs) will have capital gains and capital losses.
A capital gain is the profit you make when you sell an asset for more than you paid for it.
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.
Accumulation phase capital gains tax rules
An SMSF wholly in accumulation phase will pay capital gains tax (CGT) on the fund’s annual net capital gain. 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 – that is, 15%.
If an asset is held for more than 12 months, any capital gain is eligible for a discount of one third.
The ATO says:
A net capital gain is:
- the total capital gain for the year
- total capital losses for that year and any unapplied capital losses from earlier years
- the CGT discount and any other concessions.
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 tax treatment of capital 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 to offset future capital gains.
Capital gains tax strategies for SMSFs
An obvious strategy for an SMSF expected to make a capital gain on the sale of an asset is to defer the sale of that asset until they and all other members in the fund are in retirement phase.
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 the tax-free retirement phase.