Do SMSFs get a 50% CGT discount?
No. The CGT discount percentage of 50% applies to individuals and trusts. A self-managed super fund (SMSF) is entitled to 1/3 discount.
When is an SMSF entitled to apply the CGT discount?
A SMSF can apply the 1/3 discount to the disposal of assets which have been held for more than 12 months under the SMSF CGT regimen.
What is a capital gain?
A capital gain is made when capital assets such as shares, property, units and crypto assets are disposed of for more than the cost base or a capital loss is incurred when the consideration is less than the reduced cost base.
Refer to the ATO website for details about the cost base and reduced cost base.
What is capital gains tax (CGT)?
CGT is not a separate tax. It is the SMSF’s tax rate applied to a capital gain. Any capital losses are quarantined and offset against future capital gains. A capital loss can only offset a capital gain; it cannot offset a revenue gain.
What is the tax rate for an SMSF?
An SMSF is taxed at 15% when the fund is in accumulation mode. Net capital gains are taxed at 10% where the asset has been held for longer than 12 months. A non-complying fund and an SMSF with non-arm’s length income (NALI) are taxed at 45%.
An SMSF that is partially in pension mode receive a tax exemption on its taxable income, being exempt current pension income (ECPI) on the earnings derived from the assets used to produce retirement phase pensions. The tax rate is reduced to nil where the fund is in 100% pension mode for all of the year.
Hint – contributions are not exempt from tax and cannot be reduced by the ECPI
Capital gain vs Revenue gain
The primary code for taxing capital gains in an SMSF are the CGT rules brought in by the Hawke/Keating governments. Gains made on the disposal of SMSF assets are generally on capital account and taxed under the CGT rules. CGT rules will apply to share trading activity, even if the trading is substantial and even to assets where the intention by the trustee is to derive a gain on disposal of the asset. Historically, these events would have been on revenue account and not subject to the CGT provisions.
The CGT rules do not apply to revenue gains which include contributions, dividends, interest or trust distributions (excluding capital gains flowing through trust distributions).
Exceptions to the CGT rules include disposals of collectables which have special rules; currency exchange fluctuations and debentures, a bond, bill of exchange.
Examples of capital gains in an SMSF which are subject to CGT rules include disposals of crypto-assets ; property; shares, unit trusts and managed funds and exchange traded funds.
Capital gains tax in accumulation mode vs pension mode
CGT is 15% on net capital gains when the fund is in 100% accumulation mode, but it can be reduced to 10% when the asset has been held for longer than 12 months.
When an SMSF is in 100% pension mode for the entire year, or if it has segregated pension assets that are sold while in pension mode, there are no capital gains reported. Capital gains are disregarded and not included in the fund’s tax return, and any capital losses are also disregarded and cannot be carried forward.
When an SMSF is in partial pension mode and there are no segregated assets, an actuary will calculate the ECPI via an annual Actuarial Certificate, which is applied to the fund’s total taxable income (except for contributions), reducing the fund’s taxable income accordingly.
Expenses are apportioned between the production of pension income and other assessable income. Expenses cannot be claimed as a tax deduction if they relate to the production of pension income. Some expenses, such as the ATO supervisory levy or life insurance, are not apportioned and are fully tax deductible.
SMSF holds units in a unit trust
The only assets of a unit trust which was owned 100% by an SMSF include a bank account and a property. Under the one-off election at 30th June 2017 the SMSF elected to reset the cost base of the units
The capital gain in relation to the building is incurred in the year the gain is made. The capital gain in relation to the units is made in the year when the unit trust is wound up. The trap for an SMSF is that the two events must occur in the same year or the SMSF can end up paying unnecessary CGT.
Example – Mismatch between disposal of property and the wind up of the unit trust
A fund owned 100% of the units in a unit trust. A building acquired by the unit trust in 2014/15 had a cost base of $400,000 and was sold for $1,200,000 in June 2023/24. The SMSF elected to reset the cost base of the units under the one-off election in 2017. The cost base was reset to $900,000 which was the market value of the units at 30th June 2017. There was no CGT triggered at that time or any deferred capital gain as the fund was in 100% pension mode.
The SMSF received a trust distribution of $800,000 in 2023/24 being the capital gain made in the unit trust. The unit trust was wound up in August 2024 when the property was settled. In 2023/24 the SMSF pays tax of 0.10 x $800,000 x 0.40 (after 60% ECPI is applied) = $32,000. A CGT loss was incurred when the unit trust was wound up in 2024/25 year. The consideration for the units was nil and the cost base was $900,000 and thus the CGT loss is carried forward as no capital gains were incurred in 2024/25.
The SMSF paid CGT of $32,000 more than it should. If the capital distribution and the unit trust wind up incurred in the same year no capital gains would have been payable.