How Does Taxation Work For Gains on SMSF Investments?

What’s the go with capital gains tax (CGT) and SMSF investments Podcast Transcript

Welcome to SMSF Mate. Our general advice warning. We are required to warn you that any advice has been prepared without taking into account your objectives. Financial situations or needs and because of that you should before acting on any advice consider the appropriateness of the advice having regard to your own objectives, financial services and needs. Where the advice relates to the acquisition or possible acquisition of a particular financial product you should obtain a product disclosure statement relating to that product and consider the PDS before making any decision about whether to acquire the product. Now let’s get into it.

Gareth: Welcome everyone to Podcast X where we say X because we’re not quite sure what it is. I’ve got someone waving a five at me but we’ll go we’ll go with five, five X of the SMSF Mate.

Ashwin: That’s how good it is.

Gareth: We’re five in. I hope you’re still with us. I have a personal interest in CGT and tax. I have roped in my fellow SMSF Mater who happens to be an accountant. This is a great way of getting free advice without paying my actual accountant to tell me.

Tim: General advice.

Gareth: General advice warning.

Ashwin: There’ll be all sorts of caveats in my answer.

Gareth: This podcast today is about CGT and tax for self-managed super fund related investments. Welcome Ashwin.

Ashwin: Welcome, thanks.

Gareth: And Tim. First question I have. Self-employed, been self-employed for a long time. Always self-employed. I heard about this thing being tax related. It’s a thing that I could potentially get a tax deduction for selling some of my shares in my self-employed business and something about CGT discount into my super fund. What have I misunderstood?

Ashwin: There’s a few things. Few steps to go through there. I suppose I think what you’re probably alluding to is this there’s some small business concessions for CGT or capital gains tax for those who don’t know what CGT is. Typically in Australia if you sell an asset you pay capital gains tax on that asset. There’s a discount of 50% in your own name for selling those assets. For example let’s say you sell a share you buy for $5. You sell it for a thousand dollars. You make $995. You’ll get a 50%…

Gareth: Good investment.

Ashwin: Not bad. That’s a great return. 20x. You pay tax on half of that profit if you’ve had it for a year or more. If you had it for less than a year you pay as normal income because you’ve earned it within that one year period. There’s a different tax rate in the super fund but we’ll get to that maybe a bit later but there’s a special group of rules for small businesses that still exist at the moment depending on your small business. Meeting those exemptions so how long your business has run, the turnover, the value of the business will guide your accountant to work out if you can use those exemptions. What that basically means is let’s say you had that 995 capital gain tax you might be able to reduce it another 50% discount if you’ve had it for a certain period of time or you might be able to reduce it down to zero if you put those funds into your super fund if you’re under a certain age.

If you’re over a certain age let’s say you’ve reached closer to retirement age and you’ve met that requirement you don’t even have to put the money into your super fund. You could just get the exemption. They’re very generous CGT discounts but you do have to strongly advise people to get advice from their accountant and usually an accountant might work with a tax lawyer to actually get you that piece of advice so you’ve got peace of mind.

Gareth: Before I go agreeing to selling those shares…

Ashwin: Probably find out your taxes.

Gareth: Go and get your tax structure sorted.

Ashwin: Yes and then the next question then is what do you do without money in your super fund. Make sure that’s the right step for you because you might want to actually use that cash to pay off your mortgage or go on a big holiday to France and drink a lot of wine.

Gareth: Sounds good.

Ashwin: Sounds like Gareth’s answer so then you might want to put into super so there’s nothing wrong with not putting into your super fund. You’re not paying tax but you’re paying tax but you’re using that money in your current life instead of putting into your super fund and not accessing it later. There’s quite a few decisions to make in that process but good on you if you sell that return and get that super fund.

Gareth: Yes, amazing.

Tim: Tax whilst working, tax in retirement, what are the differences?

Ashwin: Tax while you’re working and you haven’t reached retirement it’s generally 15% tax.

Gareth: That’s going in right?

Ashwin: That’s going in and earnings. Whatever it earns it pays 15%.

Gareth: I get paid a thousand dollars a week. I put a hundred dollars into my super fund.

Ashwin: You’re losing $15.

Gareth: $15 in terms of the tax.

Ashwin: And then whatever that hundred dollars or the $85 now makes.

Gareth: To just follow the math through. My $85 goes into my super fund. I invest that. It goes back up to a hundred dollars. I pay another 15% on the $15.

Ashwin: Yes, right. While you’re working it’s all 15% except for CGT. CGT in your super fund like you get that discount for having an asset for a year in your super fund. That discount is one-third. You pay tax at 10%. Instead of 15%, two-thirds of it’s taxable. You pay tax at 10% on CGT. Now if you’re part of an industry or managed fund they’re doing those calculations for you. It’s already in your summary. If you’re self-managed, an accountant or your platform is doing that calculation for you so you know.

Gareth: Just to put it in an example. My hundred thousand dollar self-managed super fund increases by ten thousand dollars on earnings in the year. Dividends?

Ashwin: Dividends, the same thing.

Gareth: All earnings.

Ashwin: All earnings 15%.

Gareth: What if I didn’t sell my shares in the year?

Ashwin: There’s no CGT taxes.

Gareth: So it’s only when you sell.

Ashwin: It’s only at realise point. That gets to another stage. I think Tim’s question there of retirement. If your balance is under the cap which is I think it might be 1.7 but check that out. Set 1.7 million per member and you’re in retirement phase all those earnings are zero percent. The CGT gain could be delayed till you’re retired and then you don’t pay any CGT on that capital gain. If you earn, if your balance of your fund is more than the cap which might be I think it’s 1.7. Again we’ll have to check to verify that but if your earnings are above that cap you will pay tax at 15% for that proportion. Vast majority of your fund will still be tax-free but it’s a pretty generous cap.

Gareth: Is that the balance of my super fund?

Ashwin: Yes. Let’s say you had your single member fund Gareth and you got two million dollars.

Gareth: Yes for one person.

Ashwin: For one person. In your member statement it says you got two million dollars whatever up to the cap is tax-free. The portion above the tax you pay tax at 15%. There’s some tax because this only happened probably about three or four years ago. They introduced the cap because there were some people in Australia have got multi millions in their own name and it’s tax-free. Still didn’t pass a pub test. I don’t think when people found out you might have two million in your super and you’re not paying any tax at all. Now 15% is still pretty low. I think most people can swallow that if they made that much if they made money. It’s only on the earnings. It’s not on your balance.

It’s whatever you’ve earned in the fund so just be mindful of that. It’s only the portion above that. It’s not like it’s a rich tax or anything like that. Everyone’s getting a cap that’s tax-free. Anything above that cap you’re paying.

Gareth: If I’ve got a million and my wife’s got two million.

Ashwin: Her portion is going to have some tax in there. There are some potential strategies maybe to recontribute if you can to square that up so you’re both under the cap but you need to check how much you put in your fund. Balances over a lifetime to see if you can match that up but those are things you sit down with your financial planner and on that.

Gareth: It’s only the amount above the cap that is taxed.

Ashwin: These are the rules as of today. At any point the government might turn around and go hey, we don’t like it being tax-free. It’s going to be 15% for everyone forever and a day. That might be the rule right. At some point I think super for reforms will happen but my personal view is I believe the government wants people to be self-funded retirees and not rely on an age pension. There’ll always be a benefit for having investments in super but I don’t imagine that when I retire it will be tax-free. At that point I think they will need that 15% tax to pay for the stimulus we’ve received in the last two years.

Gareth: Money printing.

Ashwin: Who knows? Will we a brave government to do that and the ability of brave governments in this era is probably lower than in the Keating Howard years where decisions could be made so maybe it doesn’t happen but I think there might be a time when it might have to happen.

Gareth: As someone who has a self-managed fund do I have to sort out my tax or does the accountant do all these calculations for me?

Ashwin: Usually your accountant, if you’ve engaged an accountant will prepare that and then an auditor will review those numbers and transactions to make sure you haven’t crossed any lines. I think we’ve had a caller in the past that’s going through a platform that will do all that for you. There’s multiple options.

Gareth: I don’t have to do the calculations.

Ashwin: Knowing you Gareth I’m glad.

Gareth: Generalist question. I’m sure there are listeners who would have asked the same question.

Ashwin: There are some clients that are very good at keeping their records. They might be able to do it themselves. As a trustee of your own self-managed super fund you’re perfectly fine to do it yourself. There’s nothing stopping anyone from engaging an accounting platform, bringing in all their transactions, coding it correctly then engaging in order to check their work. That will meet the requirements. All power to you to do that.

Gareth: Okay. Good luck to me he says.

Ashwin: I’m sure you’ll nail it Gareth. No question.

Gareth: What other tax questions can we think of Tim?

Tim: Well, that’s all I had actually.

Gareth: Oh really. Super fund related tax questions. I think just because it was quite quickly. Putting money into my super fund isn’t there a cap like a $25,000 a year cap.

Ashwin: Its $27,500 is the current cap. It’s gone up.

Gareth: That’s a good deed you know because I didn’t know that.

Ashwin: Because the tax has gone up to 10%. I think its 27.5 is now the concessional limit. There is a rule that applies in it regardless of what sort of fund you’re in. You can use your unused amount of the cap from the previous years in a year. An easy way to explain that let’s say you’re employed for let’s say a hundred thousand dollars a year is what you earn. Your work’s putting in let’s say ten thousand dollars into super. That’s happened for the last three years. That means you’ve left on table fifteen thousand in the previous years. Then it could be another seventeen and a half thousand that you didn’t use in a tax deduction because you can sacrifice money to super. The HO now lets you catch up and do a big contribution in year four or five. Now that cap period is only for a five year window. It’s really easy to get that information. You can usually get it off either your mygov account. There might be a super statement in there or you call your accountant. They can run the report in, we’ve got our tax agent portal. We can run that report and say hey Gareth, this is how much you’ve got available.

If for example let’s say you had a capital gain like you said when you sold the business and you didn’t want to put in the super or you wanted to put into super you can use that concessional contribution. Let’s say you didn’t meet any of the concessions or you had a win on a share that wasn’t a business related transaction then you could reduce that tax by putting money in a super. Again before you put money in server you know you can’t touch it.

Tim: Top tip. 27.5 concessional.

Ashwin: That’s the new limit.

Tim: That includes employer contribution.

Gareth: Total contribution per person 27,000.

Ashwin: Regardless of how many funds you’ve got or anything like that. Everyone’s got the same limit so there’s no special rule for self-employed people right but if a self-employed person hasn’t put any super for two years when they’ve got the last two fifty thousands plus this year’s twenty seven and a half.

Gareth: That reduces your taxable income.

Ashwin: This is your taxable income but that cash does need to go to your super funds. You need to make sure you’ve got the money.

Gareth: Money actually has to go in.

Ashwin: Not some paper transaction. The money has to physically go to either an industry managed fund or a self-managed super fund and fill out a notice of intent document has to be completed to claim the deduction.

Tim: Okay and just non-concessional contributions what’s the goal?

Ashwin: Non-concessional contributions are a bit different to the concessional ones. It’s basically putting money into your super fund with no tax consequence. Let’s say you might put in 50 grand as non-concessional contribution whatever limits you’ve got but we use 50,000 for example. You put 50,000 into your fund as a non-concessional contribution. You don’t pay that 15% tax when it goes into the fund but whatever it earns is going to pay tax at 15%. Earnings are still 15% but you don’t get a tax deduction nor do you pay tax on it. Because you’re not getting the tax deduction for it the HO doesn’t then suck you 15%.

Gareth: For example if I was to inherit a hundred thousand dollars then I could put a hundred thousand dollars into my super fund I don’t pay any tax on the hundred thousand dollars going into.

Ashwin: As long as your limits haven’t been breached you’re fine.

Gareth: Then if that hundred thousand dollars goes up to two hundred thousand dollars.

Ashwin: You pay tax on the gain.

Gareth: On the gain which is a hundred thousand at 15%.

Ashwin: People will go well why would you do that? Well I’m pretty sure the 15% tax rate will be lower than your tax rate outside.

Gareth: If I was going to invest that hundred thousand dollars in my own name you pay top marginal tax rate.

Ashwin: Depending on your income. If you’re someone you might be 30% or you might even be the 19% or you might be tax free threshold. Sometimes it doesn’t make sense to put money in super. Depends on what your earnings outside of super.

Gareth: And whether you need the money now or in 25 years or 10 years or however old you are. It’s quite an important thing to think through the process.

Ashwin: Yep and inheritances are one of those things where I would engage an advisor at that point to take a big snapshot of where you are completely and then you can make a call where you put that 100.

Gareth: What about things like winning lotto or betting or casino? I had someone I knew who won 50,000, 60,000 at the casino. I’ve never heard of anyone actually winning anything at the casino but they actually paid out. I’m not saying they paid out. They actually on the spot gave him seventy five thousand dollars in cash if he wanted it. He went and blew a reasonable amount of it drinking but that’s a different issue.

Ashwin: Earnings from gambling as long as you’re not a professional in that space is tax free because you can’t claim the losses.

Gareth: I see.

Ashwin: There’s no tax reduction for that. That’s your own choice of spending money. Otherwise we’d all have potentially more losses to claim than so good on you for winning it. The most common thing is people will try and claim the tax deduction for the raffles. Raffles are not deductible. Just a heads up. Amount of people that go into a few big orderlies to try and think they’re helping a charity out. Yes, we’re in charity but because there’s a chance of winning.

Gareth: It’s not a donation.

Ashwin: It’s not a donation.

Tim: It’s not a deductible gift if it’s a charity.

Gareth: Tim is smiling because he is trying to put it on his tax return.

Ashwin: People make this mistake participating in something that you could win something from. It’s no longer a charity. There’s no donation. You haven’t given it up.

Gareth: Interesting. It’s funny how they don’t put that little disclaimer up top.

Ashwin: It’s there. It’s definitely there in the receipt.

Gareth: In the receipt.

Ashwin: It’s definitely there but not deductible.

Gareth: The point is I could win some money and invest it through my super fund.

Ashwin: Yes but again check with your accountant with anything you’re doing but generally that’s how.

Thank you for joining us once again if you’re interested in our waffle about self-managed super funds feel free to join us on smsfmate.com.au or search SMSF Mate in Spotify.

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Further reading: How Does Self Managed Super Fund (SMSF) Tax Work?

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