How do I calculate SMSF capital gains tax?

But he says it’s possible that the capital gains tax will be reduced depending on the method you use to calculate his taxable and tax-exempt income using what’s called segregation and the methods proportional.

Back to basics

If an SMSF can use the segregation method, it is possible to include the asset you are referring to in the retirement phase assets of the fund. Then, in the year it is “alienated”, any capital gain will be exempt from tax.

However, if the fund applies the proportional method, the investments are technically split between the accumulation and retirement phase, so that part of any taxable gain is subject to tax in the fund.

How this can work is best explained by going back to the basics.

The taxable capital gain of an investment held by a superannuation fund is determined at the time the asset is disposed of, Colley says,

Assignment can mean that the asset is sold or transferred to another party, but in some cases it is when the contract for the sale of the asset is signed by the parties.

A capital gain or loss will be equal to the market value of the asset at the time of disposal less its cost basis (which includes the value for which it was acquired by the fund plus any capital expenditures that have not not been claimed as tax deductions).

Generally, says Colley, gains are taxed on the net gain when a capital gain event occurs. For example, when dealing with real estate, the capital gain event occurs when the contract for the sale of the property is signed.

When it comes to shares, the event occurs when the ownership of the shares changes.

The gain or loss is determined in the year in which the asset is sold. For example, if a stock of a publicly traded company was acquired in 2012 and disposed of in 2022, Colley says, any capital gain or loss would be determined by the amount the fund received from the sale minus the price of stock basis.

This base cost includes the original cost plus all acquisition-related expenses. When dealing with real estate, the base price will be the original purchase price plus any capital improvements made to the property.

If a fund is fully in the accumulation phase for the year in which the investment was disposed of, any taxable capital gains would be taxed in the fund at 15%, if it has not been held for more than 12 month.

The rules get very interesting

However, if the investment has been held for more than 12 months, a one-third reduction will apply to the gain, meaning the fund pays 10% tax on the taxable capital gain.

When the fund was fully in the retirement phase for the fiscal year, Colley says, any income earned by the fund, including any taxable capital gains, will be tax exempt.

The retirement phase is when pensions paid relate to members who have met a retirement release condition for superannuation purposes or who are at least 65 years of age.

Being in retirement also means that the fund received no contributions from members or employers during the year, otherwise some of the taxable income could be subject to tax.

When a fund is in the accumulation phase and the retirement phase simultaneously, says Colley, the rules for how the fund is taxed become very interesting.

The amount of tax payable in these circumstances depends on the proportion of the fund’s assets that are in each phase of the year. It will also depend on whether the fund has so-called “small skipped fund assets” or whether the fund’s assets are segregated into accumulation phase assets and accumulation phase assets. of retirement.

Where an SMSF has “ignored small fund assets”, it must use the proportional method to determine the fund’s taxable and tax-exempt income. “Ignored Small Fund Assets” are those where the SMSF pays out at least one income stream that is in the retirement phase during the fiscal year and any member of the fund has a total super balance of over $1.6 million dollars as of June 30 of the previous fiscal year. This is also where a fund member receives a retirement income stream from the SMSF or any other super fund.

If the fund is required to use the split rule or chooses to use it, Colley says the calculation of taxable and tax-exempt income should be done by an actuary who determines the proportion of the fund’s assets that, on average , were accrued and retirement phase during the year.

He says that an SMSF that does not have “small overlooked fund assets” has the choice of having its taxable and tax-exempt income determined either by the proportionality rule and obtaining an actuarial certificate, or using a separate method.

Segregation allows the fund to allocate the assets of the fund to the accumulation phase and the retirement phase of the fund. When this method is used, there is no need to engage an actuary as the calculation can be done by the trustees, administrator, tax agent or accountant of the fund.

Maria D. Ervin