The ability to manage capital gains tax using a pension is one of the advantages of a self managed superannuation fund (SMSF) as a long-term financial planning tool. This works particularly well for assets that can not be accessed from a retail superannuation fund, such as direct property.

SMSFs are concessionally taxed at a flat rate of 15 per cent and capital gains made from investments that are held for more than 12 months are taxed at an effective rate of 10 per cent. However, SMSFs paying a pension do not pay tax on assets funding the pension.

How it works

Peter, age 50, is the sole member of a self managed superannuation fund (SMSF), and has an account balance of $550,000. The main asset of the SMSF is a rental property purchased eight years ago for $340,000. Peter intends to sell this property in the near future to pay for his retirement in the form of an allocated pension from the SMSF.

The capital gain on the property is $210,000, which will be subject to a one-third discount because it has been owned for longer than 12 months. The tax payable will therefore be $21,000 (15 per cent x 2/3 x $210,000). This is likely to be less tax than if Peter owned the property personally due to the higher marginal tax rates on individuals (up to 46.5 per cent, or up to 23.25 per cent after the 50 per cent discount for assets held for more than 12 months).

However, Peter’s financial adviser has recommended he commence an allocated pension before selling the property so that the capital gain will be entirely tax-free. Peter will save the $21,000 in capital gains tax provided the property is sold after the allocated pension has commenced.

It is important to note that when there is both pension and accumulation accounts in an SMSF, a range of options may be considered to manage capital gains.


Disclaimer: The information contained in this document is given in good faith and has been prepared from information believed to be accurate and reliable. This information is of general nature only and based on Multiport’s interpretation of the present laws but no guarantee is provided. This document is not designed to be a substitute for financial or investment advice and should not be relied upon as such. Reproduction of material in this document is only permitted with approval of the author.