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Avoiding CGT in your SMSF

It may be beneficial for trustees who buy and sell assets through their self-managed super fund to start a transition to retirement pension to escape the burden of capital gains tax.

Capital gains are profits that an SMSF makes on the sale of an asset. Capital gains tax (CGT) is a tax on the profits that a fund, or an individual, makes on the sale of an asset. According to the ATO, CGT refers to the income tax an SMSF pays on any net capital gain it makes e.g. when the fund sells an asset as part of a CGT event, the fund becomes subject to CGT.

While CGT is payable in Australia’s superannuation environment, different rates apply to different situations.

Before a pension is established within an SMSF, any assets the fund has held for less than 12 months will be taxed at 15 per cent, and assets the fund has held for more than 12 months will receive a 33 per cent discount. Therefore, the CGT rate will be 10 per cent.

Once an SMSF trustee is in pension mode, there will be no CGT payable on any transactions. This also goes for all account-based pensions and all transition to retirement pensions, making it one of the main reasons why putting money into superannuation as the lower tax rate will guarantee better returns.

For the reason outlined above, it may also be in a trustee’s best interest to start a transition to retirement pension as soon as they turn their preservation age, which is currently 56 years old.

Posted on 15 March '16 by , under Tax.

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Transition to retirement

The transition to retirement (TTR) strategy allows you to access some of your super while you continue to work.

You are able to use the TTR strategy if you are aged 55 to 60. You can use it to supplement your income if you reduce your work hours or boost your super and save on tax while you keep working full time.

  • Starting a TTR pension: To start your TTR pension, transfer some of your super to an account-based pension. You have to keep some money in your super account so that you can continue to receive your employer's compulsory contributions as well as any voluntary contributions you may be making.
  • Government benefits and TTR: The benefits you or your partner receive might be impacted if you choose to opt for this strategy. How and what exactly will change might become clearer upon discussing this with a Financial Information Service (FIS) officer.
  • Life insurance and TTR: In some cases, the life insurance cover you have with your super may stop or reduce if you start a TTR pension – check this before making any decisions or changes.

TTR can help ease your mind as you transition into retirement but it can be a bit complex. Before you choose whether you want to use TTR to reduce work hours or save on tax, or even if you want to use TTR altogether, you should figure out how this will impact all aspects of your finances.

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