Not every investment makes a profit all the time and every SMSF did not reset its CGT cost base on 30 June 2017 for investments showing a notional capital loss. So, what happens if there is a realised loss in an SMSF and how does it work for a fund part in retirement phase and part in accumulation phase or wholly in retirement phase?
Assessing losses in an SMSF will depend on whether the fund’s tax-exempt income is determined on a segregated basis or it uses the proportional method. Don’t forget, an SMSF that has at least one member with a total superannuation balance of more than $1.6 million as at 30 June in the previous financial year must use the proportional basis to calculate its exempt current pension income (ECPI). This requires an actuarial certificate for the calculation in this situation even if the fund is totally in pension phase
Capital gains and losses from segregated pension assets
The income tax law says that any capital gain or loss that a complying superannuation fund makes from a CGT event in relation to a segregated pension asset is ignored. That means any losses made on any assets which are supporting a pension in retirement phase are not offset against any capital gains on assets that are in accumulation phase. It will be only those capital losses on CGT assets which are in accumulation phase that can be offset against any capital gains in accumulation phase. An excess of capital losses in accumulation phase for a tax year can be carried forward and offset against any future taxable capital gains in accumulation phase.
Here’s an example:
Melinda and Luke are members of the Busy Bee Superannuation Fund. Melinda is in accumulation phase and Luke has an accumulation account and is receiving an account-based pension. The fund uses the segregated method to determine its taxable and exempt income. During the financial year the fund sold some of its assets used to support accumulation phase some resulting in a capital gain and others in capital losses and it made losses on assets used to support Luke’s pension as follows:
|Accumulation phase||Retirement phase|
|Net capital gain||$90,000||-|
|1/3rd GCT discount applied||$30,000||-|
|Amount added to the fund's taxable income||$60,000||$NIL|
In this example, the net capital gain from accumulation phase, after applying capital losses and the 1/3rd discount for the capital gains of $60,000 will be added to the fund’s taxable income. However, the losses the Busy Bee Superannuation Fund has incurred from the assets supporting retirement phase are disregarded.
Capital gains and losses for funds using the proportionate method
An SMSF that uses the proportionate method will need to factor capital gains and capital losses into the calculation. A net capital gain is added to the SMSF’s assessable income before applying the actuarial ECPI percentage for the tax year to work out how much income is taxable. Any net capital loss, an excess of capital losses over capital gains, that arises for a tax year can be carried forward until it is offset against future assessable capital gains.
An SMSF that uses the proportionate method to calculate its ECPI needs to follow a few steps. The first thing to do is calculate the net capital gain from all assets prior to claiming a proportion as ECPI, using the percentage from the SMSF’s actuarial certificate for the year, then use the following steps:
- Calculate capital gain, after any CGT discount, or loss for each asset disposed of during the income year which will include the amount the SMSF has deferred if the asset had its CGT cost base reset as at 30 June 2017,
- Total up the capital gains,
- Total up the capital losses from assets disposed of during the current year and offset against total capital gains from step 2. Hint: consider applying capital losses first against “other capital gains” which are not subject to indexing or discounting; then apply it against indexed gains, before finally applying the loss against discounted gains,
- If there is a remaining capital gain, offset any brought forward capital losses from prior years and again, consider the order of application of capital losses as in the previous step.
Any net capital loss that arises is carried forward to the subsequent income year, with no application of the ECPI percentage. This allows the full amount of the capital loss to be offset against capital gains in that income year which will be prior to the application of the CGT discount and the ECPI percentage. Capital losses are not reduced by the net ECPI, as is the case with revenue losses.
Here’s another example:
Michele and Tim are members of the Razor Strait Superannuation Fund. Michele is in accumulation phase and Tim is receiving an account-based pension from the fund. The actuarial ECPI% for this financial year is 60%. The fund has sold some assets during the year but unfortunately there were capital losses incurred of $160,000 but no capital gains. The capital losses will be carried forward to the next financial year to be offset against any future capital gains.
In this example, the capital loss is not applied against the ECPI% but is carried forward for future use against any capital gains. If a capital gain arises in the next financial year it will be offset against the carry forward capital loss before applying the 1/3rd CGT discount to the relevant assets.
To make sure capital gains and losses are determined correctly the starting point, just like so many other things these days, is based on how the fund calculates its taxable and tax-exempt income. Then it’s a matter of calculating the capital gain on the appropriate group of fund assets, applying discounts where relevant and then coming out with a net gain to be included in the fund’s taxable income or a net loss to be carried forward to future years.
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