Capital gains tax in super applies a similar concept to capital gains tax in your individual name.
After some research, you invest your hard-earned savings at a calculated risk. It turns out to be a sound investment. You sell it for a profit and then, WHAM! .. like a ball off Steve Smith’s bat, you’re hit with a bitter-sweet tax bill.
But don’t go calling for the third umpire just yet, because there are some tax benefits to holding investments within super compared to outside super. So let’s take a look at how it all works.
Naturally, all capital gains tax implications should be discussed with a tax professional prior to selling an asset.
Capital Gains Tax in Super
When you own an investment within your personal name and sell it for a profit, the profit is taxed at your marginal tax rate. However, if you owned the investment for longer than 12 months before selling it, only half of the profit is taxed at your marginal tax rate.
When it comes to capital gains tax in super funds, the application of capital gains tax (CGT) and the CGT rate will depend on whether the investments are held within accumulation phase or pension phase.
Accumulation phase is generally where your super is held while you are still working and contributions are being made into your super account. Pension phase is usually where your super is held when you have ceased work and begin drawing an income stream from your super.
Capital Gains Tax in Super Accumulation Phase
When you own an investment within the super accumulation phase and then sell it, capital gains tax is payable in the financial year that the investment is sold.
The capital gains tax rate applied to realised capital gains within the accumulation phase is 15%. However, if the investment sold was owned for longer than 12-months, only 2/3rds of the capital gain (profit) is taxed at 15%, because a 1/3rd CGT discount is applied. Oversimplified, this effectively reduces the CGT rate to 10% for gains derived from an investment that was owned for longer than 12-months.
If your superannuation is held within a defined benefit superannuation scheme, or one of the basic investment options within an Industry Super fund, you will not actually see any CGT being applied to your balance, because the investment manager pays all taxes out of the investment option’s pool of assets, prior to declaring the investment options unit price. So, you do pay the tax, you just don’t see it.
Capital Gains Tax in Super Pension Phase
When you own an investment within superannuation pension phase and then sell it, all capital gains are received completely tax-free.This is one of the benefits of holding your superannuation within pension phase.
To be eligible to convert your super into pension phase, you need to have met a full superannuation condition of release, such as retirement after reaching your superannuation preservation age, or reaching age 65.
If you have a transition to retirement (TTR) pension, realised capital gains are not received tax free. Realised capital gains within a TTR pension account are taxed in the same manner as accumulation phase – 15% tax, reducing to 10% if the investment sold was owned for longer than 12 months.
This video explains tax on super earnings, including Capital Gains Tax in super.
SMSF Capital Gains Tax
Capital gains tax within a self managed super fund (SMSF) is the same as it is within an ordinary superannuation fund – 15% tax on gains within accumulation phase, reduced to 10% if the investment was owned for longer than 12 months; and 0% in pension phase.
If you run a pooled or segregated investment strategy and either of which cause an asset to be owned partly in both accumulation phase and pension phase, the tax free portion of a capital gain will be proportionate to the portion of the asset that was owned in pension phase at the date of sale. However, this should be confirmed by the administrator of your SMSF.
Reducing Capital Gains Tax with Superannuation Contributions
Making personal concessional (deductible) contributions to superannuation can effectively reduce capital gains tax within your individual name, because you receive a personal tax deduction for making personal concessional contributions to super, which reduces your assessable income and can also reduce your marginal tax rate.
Making contributions to super, however, will not reduce capital gains tax resulting from the sale of investments within super.
Do Retirees Pay Capital Gains Tax in Australia?
As a retiree in Australia, you will not pay capital gains tax within super provided you have used your super to start a retirement income stream. But, should you choose to leave your super in accumulation phase after retirement, capital gains tax will still apply.
Many people confuse the two separate rules of how tax is applied to retirees. The two rules that are confused are tax on super withdrawals and tax on super earnings. One rule is age-based and the other depends on which phase your super is in, as discussed above.
Generally, if you are aged 60 or above, pension payments and lump sum withdrawals received from superannuation into your personal bank account are received completely tax free. This often gets confused with tax on super earnings.
Tax on super earnings after age 60 or 65 is not age-dependent, but rather dependent on whether your super is held in accumulation phase or pension phase. That is, reaching a certain age will not change the tax treatment on earnings within super, but it will change the tax on super withdrawals.
So that’s everything on capital gains tax in super. Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
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