How does capital gains tax in SMSFs works?

Australians who are using their self-managed superannuation fund (SMSF) for their property investment must have a clear grasp on how capital gains tax (CGT) works.

CGT works in a similar way in SMSF investing as in other vehicles — however, they may be different rules that SMSF property investors can take advantage of.

How is a capital gain calculated?

As defined by the Australian Taxation Office (ATO), a capital gain is achieved when investors end up with a profit when selling their assets.

A property bought for $400,000 five years ago and was sold later for $550,000 would mean a capital gain of $150,000 — this figure, however, has not taken into account the costs of buying and selling and the capital gains tax.

According to ATO, an SMSF’s assessable income includes “any net capital gains, unless the asset is a segregated current pension asset”.

Here’s a simple formula for capital gains from the ATO:

Net capital gain = (total capital gain for the year) – (total capital losses for that year and any unapplied capital losses from earlier years) – (CGT discount and any other concessions)

As a general rule, a capital loss is not allowed to be a deduction and is only able to be offset against capital gains.

In times when capital losses are greater than capital gains in a financial year, they must be carried forward to offset future capital gains.

How is capital gains tax calculated for SMSFs?

CGT and the tax rate for investments under SMSFs will depend on whether an asset is held within the accumulation phase or pension phase.

Assets held in the accumulation phase

As mentioned earlier, capital gains and losses made during a financial year will be considered when computing the fund’s assessable income.

The income of an SMSF is generally taxed at a concessional rate of 15% while the SMSF is in the accumulation phase.

However, if an investment sold was owned for more than 12 months, two-thirds of the capital gain is taxed at 15%, while the remaining third will bear a discounted rate of 10%.

Assets within the pension phase

Capital gains for investments sold within the pension phase will be tax-free.

Superannuation can be transitioned to the pension phase when conditions of release are met, like reaching age 65 or retiring after the super’s preservation age.

Are there CGT exemptions available for SMSFs?

According to ATO, SMSFs may qualify for concessions or exemptions depending on the circumstances of the members.

There is the concept of exempt current pension income or ECPI — this means that if any members have entered the retirement phase, SMSFs can claim an exemption for income generated by assets used to pay the super income stream.

If all members of the SMSF are already in the retirement phase, the fund’s capital gains will no longer bear CGT, regardless of the holding period of any assets it sells.