Do SMSFs qualify for the CGT discount?
- Can SMSFs access the same 50% capital gains tax (CGT) discount that individuals do?
- How does CGT apply to SMSFs?
- Are there ways to reduce CGT liability for your SMSF?
These are common questions for SMSF trustees, especially when planning to sell assets like property, shares, or managed funds. While individuals can access a CGT discount on assets held for over 12 months, SMSFs have different rules and tax advantages available to them.
In this blog, we will explore how CGT works for SMSFs, whether they qualify for the CGT discount, and how to reduce CGT liability through effective strategies. If you're looking for expert guidance, our SMSF tax accounting team at CleanSlate helps you navigate the complexities of CGT, ensuring your SMSF stays compliant and tax-efficient.
Key takeaways
SMSFs do not receive the 50 percent CGT discount available to individuals.
Complying SMSFs can access a one third CGT discount on assets held for more than twelve months.
Capital gains in a fully pension phase SMSF may be completely exempt under ECPI rules.
SMSF CGT can be taxed at 45 percent if the gain is treated as non arm’s length income.
Incorrect asset valuations or related party transactions can create NALI risks.
Do SMSFs get a 50% CGT discount similar to individuals?
SMSFs do not qualify for the 50% CGT discount that individuals can access on capital gains after holding an asset for more than 12 months. Instead, SMSFs are eligible for a one-third (33.33%) CGT discount on eligible capital gains, provided certain conditions are met.
This one-third discount reduces the tax rate from the standard 15% to just 10% on applicable capital gains. While this discount is less than the 50% discount available to individuals, it still provides SMSFs with a significant tax advantage that can help reduce their overall tax liabilities.
For instance, if an SMSF sells an investment property that has appreciated in value and generates a capital gain of $100,000, the one-third CGT discount can be applied.
Instead of paying tax on the full $100,000 capital gain, the SMSF would only pay tax on $66,667 (after reducing the gain by one-third). This reduces the tax payable from the standard 15% on the full gain ($15,000) to $10,000 on the discounted taxable amount.
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Eligibility criteria for the CGT discount in SMSFs
To qualify for the one-third CGT discount, an SMSF must meet the following conditions:
- Asset holding period: The asset must be held by the SMSF for at least 12 months. This is similar to the requirements for individuals to access the 50% CGT discount.
- Complying SMSF: The SMSF must be a complying fund at the time the gain is realised. A complying SMSF is one that meets all the regulatory requirements set by the Australian Taxation Office (ATO).
- Asset type: The asset must not be a trading stock or revenue asset. These types of assets are subject to different tax treatments.
- Non-arm's length income: If the capital gain arises from a non-arm's length transaction (such as buying assets from related parties at below-market value), the SMSF could lose eligibility for the discount.
By meeting these criteria, an SMSF can access the one-third CGT discount, which significantly reduces the tax burden on capital gains.
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When CGT in an SMSF is taxed at 45%?
Capital gains in an SMSF are normally taxed at 15 percent and may be reduced to 10 percent when the one-third CGT discount applies. However, there are two situations where the usual concessional treatment is removed and capital gains are taxed at 45 percent. Both relate to compliance and the way the fund is managed.
1. When the capital gain is treated as non-arm’s-length income (NALI)
CGT can be taxed at 45 percent if the gain arises from a non-commercial arrangement. This occurs when the SMSF is involved in a transaction that is not conducted on arm’s-length terms.
Examples include buying an asset from a related party at less than market value, receiving inflated income from a related entity, or failing to charge appropriate expenses linked to the asset.
In this scenario, only the specific capital gain or income connected to the non-arm’s-length arrangement is taxed at 45 percent. The rest of the fund’s income is taxed at normal SMSF rates. You can learn more about Non-Arm’s Length Income (NALI) for SMSFs by visiting ATO official website.
2. When the SMSF is made non-complying by the ATO
Capital gains may also be taxed at 45 percent if the ATO removes the SMSF’s concessional tax treatment. When this happens, the fund is taxed as a non-complying SMSF for that year. This means all taxable income including capital gains is taxed at 45 percent, and in the first year the assessable income can also include the market value of the fund’s assets, apart from amounts that have already been taxed. This can create a very large tax bill for the fund.
Why must trustees be careful?
The 45 percent rate is applied only in high-risk situations involving non-commercial dealings or significant breaches of super laws. Both outcomes have major financial consequences and can severely reduce the value of the fund. Ensuring transactions are at market value, keeping proper records and meeting all compliance obligations are essential steps to prevent CGT from moving into the 45 percent tax category,
Don’t leave your SMSF exposed to a 45% tax rate.
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SMSF CGT tax rates at a glance
Understanding how CGT rates change inside an SMSF can be confusing, especially when compliance, holding periods, and pension phase rules all affect the final tax outcome. The table below provides a simple comparison of how each rule impacts the tax rate.
| SMSF CGT tax rates | ||||
|---|---|---|---|---|
| SMSF scenario | Effective tax rates | When it applies | ||
| Standard SMSF (Accumulation mode) | 15% | Normal tax rate for complying funds | ||
| One Third CGT Discount | 10% | Applies when assets are held for more than twelve months | ||
| Pension Phase (ECPI) | 0% | Applies to assets supporting retirement phase pensions. | ||
| Non Arm’s Length Income (NALI) | 45% | Applies when transactions are not commercial | ||
| Non Complying SMSF | 45% | Applies when the ATO removes concessional status. | ||
Top strategies to legally reduce CGT for your SMSF
There are several strategies SMSFs can use to reduce their CGT liability legally. By employing these strategies, trustees can minimise tax while remaining compliant with ATO rules.
- Hold assets for at least 12 months: One of the easiest strategies is to hold assets for at least 12 months. By doing so, SMSFs can access the one-third CGT discount, which reduces the tax payable on capital gains.
- Ensure acquisitions are at market value: To avoid NALI issues, SMSFs must ensure that all acquisitions and transactions are conducted at market value. This includes purchasing assets from related parties at fair market prices and avoiding any non-commercial terms.
-
Maximise exempt current pension income (ECPI): For SMSFs in the
pension phase, some or all
of the fund’s income, including capital gains, can be tax free under the rules for Except
Current Pension Income. This exemption applies to the portion of the fund that is
supporting
retirement phase pensions.
When pension phase assets are correctly allocated and recorded, the capital gains from those assets can be entirely exempt from tax, which is one of the most effective ways for an SMSF to reduce its CGT liability. - Offset capital gains with carried-forward losses: If the SMSF has carried forward capital losses from previous years, it can use these losses to offset current capital gains. This reduces the taxable amount and helps minimise CGT. Accurate records are important for this step, and our professional online bookkeepers help keep your SMSF records organised throughout the year so nothing is missed.
- Avoid NALI transactions: By conducting transactions at market value and ensuring that all dealings are on commercial terms, SMSFs can avoid NALI issues and the 45% tax rate.
How CleanSlate helps trustees with SMSF CGT and compliance?
Managing CGT inside an SMSF can be complicated, especially when you need to track asset holding periods, apply the correct discounts, avoid NALI issues, and ensure pension phase assets are recorded properly for ECPI. At CleanSlate, our SMSF accountants help trustees handle these requirements. Here is how we support you:
We assist with:
- Calculating CGT correctly and applying the one third discount
- Reviewing transactions for any potential NALI risks
- Allocating pension phase assets correctly for ECPI
- Organising SMSF records for accurate year round reporting
- Assessing capital gains, losses, and tax outcomes before decisions are made
- Preparing SMSF tax returns in line with ATO rules
- Providing guidance on how CGT rules apply to your fund
Get in touch if you would like to know more about the support we can provide.
SMSF CGT discount FAQs
1. What are the tax advantages of SMSFs?
Self-Managed Super Funds (SMSFs) offer several tax advantages, including:
- Concessional tax rates: SMSFs are generally taxed at a flat 15% on their assessable income, which is significantly lower than individual tax rates.
- Capital gains tax discount: SMSFs can access a one-third CGT discount on assets held for more than 12 months, reducing the effective tax rate on capital gains from 15% to 10%.
- Exempt current pension income (ECPI): When an SMSF is in pension phase, income and capital gains from certain assets may be tax-exempt. (See earlier section on ECPI for full details.)
- Control over investments: SMSF trustees have full control over investment decisions, allowing more flexibility to manage retirement funds.
2. Who qualifies for the capital gains exemption in an SMSF?
SMSFs can qualify for the capital gains exemption under the Exempt Current Pension Income (ECPI) rules if the fund is in the pension phase.
To qualify for the exemption:
- The SMSF must be paying retirement-phase pensions to its members.
- The capital gains must come from assets that support the retirement-phase income stream.
- The SMSF must keep proper records and ensure the assets are segregated between the accumulation phase (taxable) and the pension phase (exempt income).
If these conditions are met, the capital gains on these assets will be exempt from tax.
3. What happens if the SMSF is in 100% pension mode?
If an SMSF is in 100% pension mode, there is no capital gains tax applied to the sale of assets, and any capital losses are disregarded. In this case, capital gains are exempt from tax under the Exempt Current Pension Income (ECPI) rules. However, if the SMSF is partially in pension mode, the capital gains may still be subject to tax, though the amount may be reduced based on the fund’s exempt income percentage.
4. Can an SMSF defer capital gains tax by reinvesting the proceeds?
No, SMSFs cannot defer capital gains tax (CGT) simply by reinvesting the sale proceeds. CGT is triggered when an asset is disposed of and must be reported in that financial year. Reinvesting the amount does not delay or reduce the tax obligation.
However, trustees can manage CGT through strategies like holding assets for over 12 months to access the one-third discount, applying carried-forward capital losses, or timing asset sales during the pension phase, where gains may be exempt under ECPI rules.
Final thoughts
Understanding how the CGT discount applies to SMSFs is a key part of managing the tax impact of your fund. While SMSFs do not receive the same discount as individuals, the one third concession, ECPI rules and proper reporting still offer ways to reduce tax when handled well. Keeping track of holding periods, checking that every transaction is at market value and avoiding NALI issues all play an important role in lowering tax and meeting ATO requirements.
If you would like support with reviewing your fund or understanding how these CGT rules apply to your situation, our SMSF experts walk you through the details and help you stay on track. You can book a call if you would like to speak with us.
