Property in SMSF – don’t forget about Capital Gains Tax
One of the most compelling arguments for superannuation is its status as a savings vehicle that attracts a lower rate of tax. As a trade-off for these concessions, the Australian Government applies a set of taxation laws that pertain to any capital gains or losses realised on the sale or transfer of an asset.
If your SMSF currently invests in property, or you’re thinking about the possibilities of property acquisition, be aware that CGT will apply whenever property is disposed of. The method used for calculating the CGT gain or loss will vary depending on the purchase date of the asset, and the length of time for which the asset was held.
|
CGT calculation method |
Description |
|
Indexed method |
This method applies to properties purchased before 21 September 1999 that are held for 12 months or more.
The Cost Base of the property is increased by an indexation method based on quarterly Consumer Price Indices (CPI) up to September 1999.
Usually, CGT will not apply on assets purchased before September 1985. |
|
Discounted method |
Complying SMSFs that hold a property longer than 12 months are entitled to a one-third reduction in the amount of the capital gain. This effectively reduces the tax rate from 15% to 10%. |
|
Basic method |
For any property purchased after September 1999 that is held for less than 12 months, the calculation method is simply the Capital Proceeds less the Cost Base. |
These methods are reasonably uncomplicated; more complexity arises when determining the Cost Base.
The Cost Base of a property can be affected by a number of factors. These include:
Acquisition costs: This is the amount of money paid to purchase the property.
Incidental costs: These include expenses such as solicitor’s fees, conveyancing costs, title searches and stamp duty associated with the purchase of the property.
Costs of owning the property: These may include rates, land tax, interest on borrowed money and the cost of repairs. It is important to note that these costs may be subject to restrictions that apply in certain circumstances, and therefore, professional advice is recommended.
Costs of improving or preserving the property: This is capital expenditure used to increase the asset’s value, but does not include costs for which a rebate or tax deduction was received.
Case study
In July 2008, Rogerson Real Estate SMSF purchased an office in an inner Sydney suburb from which Rogerson Real Estate intended to conduct its business. The property was to be rented by Rogerson Real Estate from the SMSF. The rent paid to the SMSF was a tax-deductible expense of the business, but the rent received by the SMSF was deemed income as it would help to increase the members’ retirement benefits without using up part of the contributions cap limit.
The purchase price of the property was $450,000, although the property needed some minor refurbishment – mainly painting, carpet and a new hot water service – before it could be used as Rogerson Real Estate’s office.
The rental income received by the SMSF from Rogerson Real Estate was taxed at a maximum of 15% during the fund’s accumulation stage, and at 0% at pension stage.
Four years later, the property was sold for $610,000. The asset disposal was subject to CGT. In order to calculate the CGT, the Cost Base had to be determined.
The following shows the calculation of the Cost Base.
|
Purchase element |
Cost |
Deduction / Rebate |
|
Acquisition cost of the property |
$450,000 |
|
|
Incidental costs of purchasing the property |
$20,000 |
|
|
Cost of owning the CGT asset |
$30,000 |
|
|
Cost to improve or preserve the property – minor renovations were carried out. Part of the refurbishment included a solar-powered hot water service. |
$25,000 |
|
|
Deductions and/or rebates – a government rebate was received for the installation of the solar hot water system. |
|
($3000) |
|
Total Cost Base |
|
$522,000 |
The property was purchased after September 1999 and was held for more than 12 months; therefore, the CGT discounted calculation method applied.
|
CGT Calculation |
Amount |
|
Capital proceeds |
$610,000 |
|
Cost base |
($522,000) |
|
Capital gain |
$88,000 |
|
CGT liability = $88,000 * 10% |
$8,800 |
Other factors that may be considered are:
- the expenses associated with preserving or defending the ownership of the asset
- the depreciation costs
- the time and financial outlay of maintaining accurate and extensive records.
Given the broad range of elements contributing to the Cost Base, it’s possible to realise a capital loss on disposal of the asset.
In this situation, the loss is not considered an allowable tax deduction and can only be used to offset other capital gains. Should capital losses exceed capital gains in any income year, the loss is carried forward to offset future capital gains.
Owning property is an increasingly popular investment approach. However, assets should be acquired with appropriate thought given to investment time horizons and growth potential, in line with the fund’s overall portfolio strategy. Please contact us if you have any questions.
Sources:
www.superguide.com.au CGT Calculations for SMSFs 11 Dec 2011
www.ato.gov.au Step by step guide to capital gains (last modified 29 June 2011)
www.thesmsfreview.com.au Taxation within a SMSF (last modified 2010)