Gareth Lane
Ashwin Ramdas
Updated Jul 11, 2023
Mate Checked
When you sell shares, property or a business and generate a profit, you have made a capital gain on the transaction. Capital gains are generally considered taxable income but exactly how much tax is payable on this income often boils down to how long you have held the asset before selling it.
Having an SMSF provides the trustees of the fund with a greater level of flexibility to buy and sell investments provided they stay within the bounds of the trust deed and superannuation law. With greater control over the investments comes greater control over the capital gains tax.
When you buy and sell assets within the SMSF to generate a return, you may attract capital gains tax on any earnings when you sell the asset. Exactly how much capital gains tax you will incur depends on a variety of factors which we will analyse in more detail below. Of course, you should always seek personal financial advice and tax advice on the topic but we have provided some general information below for you to consider with any future capital gains.
A capital gain is when you sell an investment for more than you bought it, resulting in a profit. For instance, if you purchased an investment property for $500,000 and sold the property after five years for $700,000, you would have made a capital gain of approximately $200,000, minus transaction costs of course. On the flip side, if you purchased an investment property and you sell it for less than what you paid for it, you have made a capital loss.
As an individual, you are required to report any capital gains or losses in your personal tax return and pay tax at your marginal tax rate. SMSFs are in a similar boat and must also include capital gains and losses in their annual tax return.
An SMSF is generally taxed at the concessional tax rate of 15%. However, this can change if the fund is in the retirement phase. Capital gains or capital losses incurred by the SMSF during the financial year will be included in the income of the SMSF. By holding onto an investment for longer than 12 months, an SMSF may be entitled to discount the capital gains tax by 33%, which means approximately two-thirds of the capital gain will incur the tax. Another way to put this is that the SMSF will pay an effective tax rate of 10% after the one-third discount is applied to the standard 15% rate, where this discount can be applied.
When the SMSF is in the retirement phase and paying income to members, it’s possible that the fund can pay even less tax during this phase of the SMSF’s operation. This is due to the fund’s ability to claim an exemption for any income that is generated by assets used to pay members, taking the effective tax rate to zero in this instance. When all the members of the fund are in the retirement phase, and none are in the accumulation phase, and they’re being paid by the SMSF then the fund will pay zero tax on any capital gains, regardless of how long the investment has been held for.
| The effective tax rate on capital gains | ||
| Time the asset has been held by SMSF prior to sale | Accumulation phase | Retirement phase |
| Less than 12 months | 15% | 0% |
| More than 12 months (33% discount) | 10% | 0% |
It should also be said that the above applies not only to SMSF’s but also to regular superannuation funds, so if you have an industry super fund or retail super fund you will likely pay similar rates of tax. Because of this potential tax advantage during the retirement phase, it is worth carefully planning when you dispose of assets if you are close to this phase in the fund as it can be the difference between paying some tax or no tax at all.
Things can get a bit more complicated when only some of the members of the fund are in the retirement phase, and some are in the accumulation phase or a combination of both. The capital gains tax treatment of assets in this scenario all comes down to whether the assets are segregated or unsegregated. Another consideration is the ‘transfer balance cap’ and if the proceeds from the sale of an asset will breach the upper limit on the amount that can be transferred and held onto during the retirement phase.
It can be worthwhile considering professional tax help when it comes to making decisions about the fund and the related capital gains tax, and this can help avoid costly mistakes and incurring tax penalties.
When an SMSF is solely in the accumulation phase, the fund will pay tax on the net capital gain. If the investment is held for a period greater than 12 months then any capital gain is eligible for a one-third discount.
Net gains are treated the same as income with regards to tax making the effective rate 15%. To qualify for the concessional tax rate of 15% on all income within the fund, you must be a fully compliant SMSF and adhere to all legal and reporting requirements. Non-compliant funds may incur a penalty tax of 45%.
Selling an asset while in the accumulation phase which results in a capital loss can only be used to offset capital gains and not used to offset other income within the fund. Capital losses can also be carried forward to future years in the accumulation phase if need be to offset capital gains when required. There is no time limit on when a capital loss can be used to offset a capital gain in the future which might come in handy.
Given the tax advantages relating to capital gains when an SMSF is in the retirement phase, the most apparent strategy is to delay the sale of an asset until all members in the fund are in the retirement phase. This approach gives you a great reason to stick to the classic buy and hold investment strategy.
Realising gains from an investment outside of super, then paying the applicable CGT and using the remaining revenue to contribute to super could be worth considering. Earnings in super are subject to a lower tax rate on investment earnings, which can compensate you for the CGT payable. When doing so, you could be eligible to use the tax deduction to offset a part of or all of the CGT liability. Considering the tax-deductible amount of the super contribution will be taxed at the concessional rate of 15%, this strategy can allow you to make larger contributions to super to grow your retirement savings faster. Receiving professional advice on this topic is the best way for a financial advisor to understand your personal financial situation to determine eligibility.
What are the steps to claim the tax deduction?
You will need to submit a Notice of Intent form to be eligible to claim a tax deduction on the super contribution. Then you will need to receive notice of acknowledgement from the super fund before you submit your tax return, move funds for a contribution, withdrawal, rollover or pension payment.
Ensure you fully utilise the tax deduction
Reducing your assessable income below the lowest marginal income tax rate where 19% is currently payable is generally not tax-effective to claim a deduction. In this scenario, it would result if you pay more tax on the contribution to super than you would save from the deduction.
On top of the one-third discount rule, your SMSF could also qualify for additional tax concessions if any of the fund’s members are in the pension phase. When this happens, the SMSF will begin paying the members a pension income stream; the SMSF may pay even less capital gains tax. SMSFs in the pension phase can claim an exemption for any income generated by assets used to pay a superannuation income stream. According to the ATO, if an SMSF trustee claims the exemption, it can lower the tax rate on those amounts (including the CGT) to zero. When all of the SMSF members are in the retirement phase (none in the accumulation phase), this can mean that the SMSF is eligible to pay no CGT on investment earnings, regardless of the assets it sells and the ownership period.
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