Capital Gains Tax - A Rundown With 2 Simple Yet Effective Strategies

Investment can be a game of two halves - the joy of capital gains as asset values rise, and the sting of capital losses when those values decline. Despite the goal of investment being capital growth, substantial capital gains can result in tax liabilities when assets are sold.

When managing your Self-Managed Super Fund (SMSF), strategic planning can allow you to handle Capital Gains Tax (CGT) within your portfolio effectively, thereby mitigating its impact on your super balance.

Critical to Note:

Before implementing any strategy to minimise your tax, always consult a registered tax agent or accountant. CGT is a labyrinthine part of taxation law, and a qualified tax expert can help you navigate the rules and potentially identify other tax minimisation methods.

This information is generally applicable and should not be taken as financial advice as it does not take into consideration you personal circumstances.

Understanding Capital Gains and CGT:

To formulate strategies, it's essential to have a fundamental understanding of how CGT works. CGT is incorporated into the regular income tax of your SMSF (or your income tax for gains outside of super) - it isn't a separate tax. According to tax law, a sale of an asset that yields a capital gain typically incurs tax on the capital gain made since the asset's purchase.

Take this instance - if Super Fund A purchased Asset X for $100,000 three years ago and sells it for $120,000, the capital gain on that asset is $20,000. Conversely, if Asset X is sold for $80,000, the fund incurs a capital loss of $20,000.

Your capital gain is calculated by offsetting it against any capital losses to determine your net tax position, upon which the CGT is based. Usually, there is no time constraint on how long a capital loss can be stored to offset future capital gains.

According to the ATO, a net capital gain is calculated by subtracting total capital losses for the current year and any unapplied capital losses from previous years, as well as the CGT discount and any other concessions, from the total capital gain for the year.

CGT Liabilities in an SMSF:

During the buying and selling of assets within a financial year, SMSFs typically yield both capital gains and capital losses. The CGT liability for any capital gain is dependent on whether the fund is in the accumulation or retirement phase, and whether members are present in either of these phases.

Accumulation Phase CGT Rules:

For an SMSF entirely in the accumulation phase, CGT is payable on the fund’s yearly net capital gain. This net gain is considered income for tax purposes, so it's taxed at the same rate (15%) as other income in the fund. An asset held for over 12 months qualifies for a one-third discount on any capital gain, resulting in an effective tax rate of 10%.

Retirement Phase CGT Rules:

As income earned during the retirement phase is tax-free, an asset sold in this phase will not incur a CGT liability on the capital gain.

Managing Capital Gains and Losses in Your SMSF:

Strategy 1: Deferring Capital Gains

Deferring capital gains involves postponing the sale of an asset expected to yield a capital gain until all members of the SMSF are in retirement phase.

Strategy 2: Using Capital Loss to Offset a Capital Gain

Capital losses from asset sales within the SMSF can be kept until the fund realizes a capital gain. If the fund foresees a capital loss in a specific year (like from selling a poorly performing asset), it's advisable to realize a capital gain in the same financial year.

This strategy becomes beneficial as fund members approach retirement, as capital losses held forward become redundant once the SMSF moves wholly from accumulation phase to retirement phase, becoming tax-free.


Source: https://www.superguide.com.au/smsfs/capital-gains-cgt-super