Do you wonder the potential tax savings you may gain through your Self-Managed Superannuation Fund?
Today, we are highlighting the tax benefits of Capital Gains Tax (CGT) and your investment properties when held for less than 12 months or more than 12 months as an individual tax contribution. This is followed by a 20-year comparison assuming the property has gained in capital and held within a SMSF.
The calculations are truly astonishing and draw attention again to the potential benefits of having complete, ‘hands-on’ control of your finances. SMSFs are not for everyone. You can establish here if you are Ready to Run Your Own SMSF. This is a blog post we have recently released for tax season 2016, it provides insight as to whether you might be prepared financially or personally to manage an SMSF.
There are often questions of what the CGT actually is. You have the purchase plus expenses, or Capital. You sell for a profit, or Gains. You pay on the gain, or Tax. Think of it like a business. You buy and sell, with the intent of making a profit. You then pay tax on the profit after expenses.
Below is a chart outlining potential savings on CGT through an SMSF, it is a completely fictional scenario.
For the purposes of showing an example of a tax comparison, a real property is used. The numbers here do not take into consideration CPI increases or market fluctuations for property prices or the costs associated with buying, selling, maintaining or improving the property, nor individual circumstances.
All figures in the table below are in AUSD ($) unless otherwise specified.
Explanation of Tax Parameters
Nominal tax rates are based on an average of 30% for individuals. An SMSF CGT is 15% under 12 months and 10% after 12 months. If selling within 12 months capital gains are taxed on 100% of the gain. If selling after 12 months capital gains are taxed on 50% of the gain.
Assuming a property is purchased for $400,000 and the property gained in value by $200,000. If selling the property within 12 months you are taxed on 100% of the capital gain at the nominal tax rate
Presented as an equation, looks like this: Capital Gain is $200,000 X 30% nominal tax rate = $60,000 in CGT.
If selling the property after 12 months you are taxed on 50% of the capital gain at the nominal tax rate: CG $200,000 X 50% = $100,000 X 30% = $30,000.
Measuring the same effect however with the property held in an SMSF, the following equation would occur: CG $200,000 X 15% = $30,000 or CG $200,000 X 50% = $100,000 X 10% = $10,000.
If the property is then sold after 20 years at 3 times the original purchase price, that is $1,200,000. The capital gain would be $800,000, the nominal tax at 30% would be $240,000.
Or if still in accumulation phase: CG $800,000 X 10% = 80,000, a saving of $160,000. If the SMSF is in pension stage, there is currently no CGT in place, as of September 2016. That is a $240,000 tax saving.
The total difference between an individual property investment and SMSF is significant when taking into consideration both incomes from rent and the sale price. This is particularly true in the pension phase.
Keep in mind that there are always risks associated with any investment that could result in a negative outcome and remember the example given above is a fictitious scenario. These totals are based on basic and nominal possible tax rates and are relayed as an information overview only.
Importantly, you also may want to consider the proposed changes in superannuation tax laws released in the 2016/17 Finance Budget by the Australian Federal Parliament. Proposed changes to impact an SMSF include the CGT.
New superannuation reforms target capital gains or profits during the pension phase of an SMSF. That being said however the CGT in pension phase will still be (we hope) a considerably lower tax percentage when compared with a single property investment over the same period of time.
The super reforms are currently pending negotiation in the Australian Federal Parliament. Once passed, they will be legislated for the next financial year from July 1, 2017. Careful consideration is to be given to the intricacies of the reforms, particularly SMSFs in pension mode. People with an SMSF should seek advice in regard to their individual circumstances, the reforms and their impact.
On many different levels, it just doesn’t seem fair to obtain CGT from an individual or an SMSF in pension mode. There are many valid arguments for and against imposing CGT on SMSFs. Feel free to put your thoughts in the comments section below.
Personally, I would like to think that by the time I have 10,20, 30 years to live in retirement I will have paid my taxes. What remains financially is the efforts of a life of work savings and investments. Retirement is a bit like your birthday and christmas for example, we all know it’s coming, it will happen and we know the benefits of planning.
After a lifetime of taxes, a career of salary sacrificing, investing and saving, financial wins and losses, at what point do we say ‘Taxes Paid!’? I understand the great divide between the financially secure and the degree of government dependency, although our retirement is sacred. We work for necessities and luxuries, and most of us work for a financially secure and healthy retirement.
The proposed CGT in the pension phase of an SMSF is ripping the core beliefs instilled by both society and the government. That is, in this instance to be financially independent, save, invest wisely, place no demands on society or the government and manage your money efficiently. The clear message is control your finances, now and for retirement.
The superannuation reforms destroy the fabric of this education or mindset. Imposing a CGT rate on the pension phase of SMSFs clearly sends the message that you can manage your own money more effectively than others might have, so we will tax the gain you have earned over your lifetime. We will punish your initiative, your intelligence, your education, your willingness to take risks and ultimately your financial freedom. Just to be clear, the tax will be imposed when you require funds the least – retirement.
There are a huge number of variables at stake and many valid reasons to impose a CGT on SMSFs in pension mode. The key here is people who have successfully managed their superannuation and savings via an SMSF, currently enjoying their pension phase lifestyle, are being punished for their life of financial independence.
The exact financial independence the government lobby’s for they are now choosing to take their piece of the pie that individuals work their entire life for, literally. Simply, because the country they are employed to run is not financially secure or rather unable to cope with the demands of modern day society, so another tax is imposed.
However, the question that may be asked with all financial consideration aside, is the sacred space of retirement tax free? Currently, the freedom of retirement, the space we work hard and save for, is a moving tax target for today’s politicians. Taxes only go one way – up, and caps only go one way too – down.
Imposing a ‘gains’ tax rate on sold investments from within an SMSF, knowing Trustee/s are retired is a moral mine field, surely? The SMSF in pension mode indicates this. Further, it is a strong rhetoric to the very framework of socio-economic education the country thrives upon and ultimately likely to survive upon.
Please refer to our August SMSF Com Newsletter for more info on the CGT and potential impact for you.
Capital Gains Property Exemption Tool
If you had sole or joint ownership of a property that you sold or are going to sell this tool will help you work out what portion of your capital gain is exempt from CGT. ATO Calculators
This article was created as general information only and not to be considered complete or advice. Individual circumstances and financial needs vary from person to person and the intent is to provide an overview of the considerations concerning SMSFs or investors. Links to other sites do not constitute endorsement or accuracy of the information contained within the referenced website.