What happens when you sell SMSF property

This will depend on whether you sell your self-managed super fund (SMSF) property to a related party such as a member or other related party or selling the property to the public.

Regardless of who the property is sold to capital gains tax applies to the sale.

Capital Gains on disposal of SMSF property

An SMSF realises a gross capital gain if the profit from selling a property exceeds the cost base of the property. Conversely, a capital loss occurs when the cost base surpasses the selling price. The cost base of the property includes more than just the acquisition cost.

What is the cost base?

The cost base includes such things as:

• the cost of acquiring the property
• fees for services incurred in relation to acquiring or disposal the property such as agent’s fees, surveyor’s fees, legal fees and the cost of tax advice by a registered tax agent
• stamp duty
• costs of advertising or marketing
• costs of obtaining a market valuation to calculate a capital gain or loss
• costs such as rates, insurance premiums or land tax where the expenses are not deductible generally associated with vacant land

Capital gains tax is applied to the net capital gain.

What is a net capital gain?

An SMSF pays tax on net capital gains which is:

• your total capital gains from disposal of all SMSF property in a financial year
• add any deferred capital gains from 2017 election #
• less any current capital losses or carry forward capital losses
• less a 1/3 discount on property held longer than 12 months (not applied to deferred capital gains)
• less the percentage of exempt current pension income (ECPI) (not applied to deferred capital gains)

#  trustees paying pensions in 2017 could elect a once off CGT relief allowing the cost base of certain assets to be “reset” to their current market value due to the introduction of the transfer balance cap (TBC) being the maximum amount a person could have in retirement phase pensions. The deemed net capital gain could be deferred until the actual disposal of the asset.

 Example – disposal of property by Paul’s SMSF with a cost base of $450,000 and consideration of $1,000,000. The property has been held for 4 years and the fund is providing Paul with a pension. The fund has carried forward capital losses of $300,000 and deferred capital gains of $50,000. The actuary has determined the ECPI is 35%.

	$
Gross capital gain	550,000
Add: deferred capital gain	50,000
Less: carried forward capital loses	(300,000)
	300,000
Less: CGT discount $300,000 ($550,000 – $250,000)/3 =	(100,000)
Net capital gains	200,000
Less: ECPI 35% X $200,000 =	(70,000)
Taxable capital gains	130,000
Tax at 15%	19,500

Accumulation Phase

When the fund is in accumulation phase tax is levied on net capital gains at 15% in a SMSF. The capital gains are reduced by 1/3 discount where the property has been held by an SMSF for longer than 12 months which is less than the 50% CGT discount for individuals but still effectively reduces the tax rate to 10% in the accumulation stage.

Pension Phase

Net capital gains are reduced by the ECPI when a fund is in pension phase. The SMSF’s assets can be pooled to all members in pension and accumulation phases. The ECPI is applied to all of the taxable income of the SMSF excluding taxable contributions. Deductible expenses are also reduced by the ECPI.  Some expenses such as life insurance or the ATO supervisory levy are not affected by the ECPI and remain fully deductible.

A property can be set aside and segregated to a member’s pension balance. The income, including capital gains, arising from the segregated property is 100% tax free when it is disposed of. If the property in the above example was segregated to Paul’s pension account, the fund would save $19,500 in tax.

Selling SMSF property to a member

Can I acquire a property from my SMSF?

An SMSF property investment can be sold to a SMSF member or other related party. Unlike the acquisition of property from a member there is no superannuation laws prohibiting the disposal.  However, the disposal must be made at arm’s length and evidence obtained from an external party such as a qualified valuer as supporting audit evidence. The fund is subject to capital gains tax on the transfer and stamp duty is payable by the member based on the valuation and the state based rules. The title must be transferred from the SMSF to the member.

Can my SMSF transfer a property to me as a super withdrawal?

Yes. Access to part of the member’s super balance can be paid via a transfer of property in lieu of a cash payment. The withdrawal as a lump sum payment can only be made if the member has a condition of release such as being over 65 or over 60 and retired. The lump sum withdrawal is tax free provided the member is over 60 at the time the property is transferred.

However, it cannot be made as a pension payment which is required to be paid in cash. A partial commutation of the pension may be satisfied via an in-specie transfer of property. Of course, your pension must have a sufficient balance to support the value of the property transfer and enough cashflow to pay the pension minimum for the financial year in which the transfer is made. An in-specie transfer of property cannot be made from a member’s transition to retirement pension (TRIS) as a partial commutation of a TRIS is prohibited.

The transfer is a disposal from the fund’s perspective and subject to capital gains. The property is required to be transferred at market value and stamp duty is payable by the member.