Capital Gains Tax (CGT) in a Self-Managed Super Fund (SMSF)
A self-managed super fund (SMSF) must pay capital gains tax (CGT) when it applies. The rules for SMSFs differ from those for individual taxpayers, so it’s important to understand how they work. To manage CGT correctly, consult an accountant or financial adviser who can give tailored guidance.
When you invest, you make a capital gain if the value of your assets rises. On the other hand, you may face a capital loss if asset values fall.
The main goal of investing is to grow your wealth, but significant gains also come with tax consequences. When you sell assets, you may owe tax on the profit.
Capital Gains Tax in Superannuation
If you sell an investment in your own name, the profit is taxed at your marginal tax rate. However, if you hold the investment for more than 12 months, only half of the gain is taxed at that rate.
CGT inside an SMSF works in a similar way.
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Accumulation phase: Gains are generally taxed at 15%. If the asset is held for more than 12 months, the tax drops to 10%.
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Pension phase: Capital gains become tax-free. Any profits from selling assets in this phase are not subject to CGT.
Things to Consider
The CGT payable by SMSFs can vary depending on several factors. Here is a breakdown of the general rules and potential scenarios:
Concessional Tax Rate
During the accumulation phase, SMSFs are generally taxed at a concessional rate of 15% on their assessable income, including capital gains. If the gains exceed any losses, the SMSF will typically pay CGT at 15% on the excess amount.
Non-Complying Funds
SMSFs that fail to meet their legal obligations are considered non-complying. Such funds are not eligible for concessional tax treatment and are subject to the highest marginal tax rate, currently 45%. This higher rate applies to all assessable income, including capital gains.
One-Third Discount Rule
If an SMSF sells an asset it has owned for at least 12 months, it may be entitled to apply a one-third discount to the capital gain. In this case, only two-thirds of the revenue would be subject to tax. Consequently, the effective tax rate on capital gains where the discounting rule applies would be 10%.
CGT Exemptions For SMSFs
Depending on the circumstances of the SMSF members, additional tax concessions or exemptions may be available. If members have entered the retirement phase and the SMSF has commenced paying them a retirement income stream, the fund may qualify for further CGT benefits.
As a retiree in Australia, you are not required to pay capital gains tax on your superannuation investments if you have utilised your super to commence a retirement income stream. In this case, the earnings within your super are tax-free.
The tax on super withdrawals is age-based. Once you reach preservation age, you can access your super as a retirement income stream as a lump sum or regular payments. These withdrawals are generally tax-free.
On the other hand, tax on super earnings depends on the phase your super is in. If your super remains in the accumulation phase after retirement, capital gains tax will apply to any earnings or gains generated within the fund.
