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Self Managed Super Fund (SMSF) Article
How is CGT worked out?

By Tony Negline.

This article may be out of date.

27th July 2005

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All super funds have to know how Capital Gains Tax impacts current and future investment decisions.  According to Australian Taxation Office statistics in the 2002/03 year a quarter of all super funds declared over $1.11b of gains and paid $159m in CGT.

What assets Capital Gains Tax applies or doesn’t apply to, when it applies and how it is calculated are all important points to know.

It is commonly thought that CGT is charged at 10% for super funds that have to pay it.  This is a dangerous simplification.

Typically super funds with members who have yet to retire (that is, members who are in the pre-retirement or accumulation phase) will have to pay CGT when they sell assets for a profit if they are used to build those members’ account balances.

As we will discuss in more detail shortly, CGT does not apply to the buying and selling of assets which support a super fund’s current pension liabilities.

Under the CGT rules you must be able to work out when you acquired an asset, how much you paid for it and how much you spent to acquire it.  You must also be able to work out when you disposed of it, how much you got for it and how much you spent to dispose of it.

In all there are fifty-two different rules for calculating capital gains and losses.  These rules determine when exactly an asset might have been created or acquired and disposed of and how the gain or loss is determined.  Not all of these rules apply to super funds.  The ATO has published a very handy checklist which will help you work out if there are CGT implications from a range of assets which you can get at http://www.atcbiz.com.au/index.php?d=uzbq.

You will make a capital gain if the amount you receive on sale is greater than what you spent to acquire and sell the asset (these costs are called the “cost base” of a particular asset).  There are five items which make up the cost base of an asset including the money given for the asset and the incidental costs of acquiring or selling an asset (for example, stamp duty, professional fees and advertising costs).

You will make a capital loss if the “reduced cost base” is greater than what you received on the assets disposal.  The reduced cost base is nearly always the same as an assets’ cost base.

It is commonly thought that any profit on assets purchased before 20 September 1985 will be CGT free.  Whilst this is true for individual taxpayers it is not true for superannuation funds.

When Paul Keating began taxing the income earned by super funds in 1988 he also introduced a sneaky CGT impost.  The cost base of any asset bought before July 1988 will be the higher of the actual cost base and the market value on 30 June 88.  CGT is applied from July 1988 if an asset bought before then is sold at a profit.  This means that all assets sold by super funds may be subject to CGT. 

And to make matters a little more complicated, super funds that bought assets between September 1985 and before 11:30am (Canberra time) on 21 September 1999 have two ways to calculate the amount of gain subject to CGT.  A super fund can choose to work the capital gain using the ‘discount method’ or the ‘indexed method’.

The ‘discount method’ takes the capital gain and subtracts the cost base and any available capital losses from previous asset sales.  If there is any gain left, two-thirds of that gain is subject to super fund taxation.  (We now know where the 10% tax rate on super fund capital gains comes from – it is two thirds of 15%.)

A super fund using the ‘indexation method’ will index an asset’s cost base by CPI movements.  However cost base indexation ceases after September 1999.  However under the indexation method, capital losses are treated differently and more favourably.  The net gain is worked out by taking away the indexed cost base from the sale proceeds.  Capital losses are then used to reduce the net gain.

If a super fund has more than $10,000 in total capital gains or losses then they must submit a special schedule with their annual income tax return.

Special CGT rules exists if an asset has been depreciated for tax purposes over time.

We mentioned above the CGT exemption that specifically applies to assets supporting pensions.  This exemption only applies to assets which support current pension liabilities.  All capital gains earned on assets backing allocated pensions and term allocated pensions will be CGT-free because these pensions will only ever have current pension liabilities.

Other pensions, such as defined benefit lifetime and term pensions will almost have current pension liabilities and non-current pension liabilities.  The non-current pension liability assets are there to help the pension cope with bad investment experience or longevity of the pensioner.  In effect it is money put aside for the unexpected ‘rainy day’.  The earnings, both income and capital gains, on these assets is subject to tax within the super fund.

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This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

 
 
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