How capital gains and capital losses are treated when an SMSF has ECPI

The effects of capital gains and capital losses differ depending on if the segregated assets method or the proportionate method was used to calculate ECPI.

If your SMSF has segregated current pension assets, you should ignore any capital gains or capital losses resulting from the disposal of these assets. If the disposal of a segregated current pension asset results in a capital loss, this loss must not be offset against any other capital gain earned by the SMSF.

If you're using the proportionate method, you need to factor in capital gains and capital losses. However, capital losses that arise aren't included when you calculate assessable income. If your SMSF has a net capital loss, it can be carried forward each year until it can be offset against an assessable capital gain. The SMSF's capital gain less any capital losses equals the net capital gain.

The net capital gain is added to the SMSF's assessable income before working out how much of income is tax exempt, as per the actuarial calculation for the relevant year.

For more information, see Transitional CGT relief.

Example 7; capital gains and capital losses for SMSF's

Note: This example uses the same facts as example 1.

AXY SMSF has two members. It has segregated assets set aside for member A that resulted in a capital gain of $10,000 and derived $50,000 of ordinary income. The other assets set aside for member B derived ordinary income of $25,000 and resulted in a capital loss of $15,000.

Therefore, the ECPI is the $50,000 for member A. The $10,000 capital gain from these segregated assets is ignored. The $15,000 capital loss from the other assets is carried forward to future years until it can be set off against an assessable capital gain.

This would be shown on the SMSF annual return as follows:

Section B, Item 11 Income – Example 7
Field	Value
Net capital gain (label A)	$0
Assessable contributions (label R)	$0
Other income (label S)	$75,000
Gross income (label W)	$75,000
Exempt current pension income (label Y)	$50,000
Total assessable income (label V)	$25,000

Section E, Item 14 Losses – example 7
Field	Value
Net capital losses carried forward to later income years (label V)	$15,000

Note that you should also include ECPI in Section A label 10A of the SMSF annual return.

Complete a Capital gains tax (CGT) schedule 2018 (NAT 3423-6.2018) if your SMSF has one or more CGT events that happen during the income year and either:

a CGT event happens in relation to a forestry managed investment scheme interest that is held other than as an initial participant
the total current year capital gain or capital loss is greater than $10,000.

See also:

Guide to capital gains tax (NAT 4151).

End of example

Transitional CGT relief

In 2016–17, SMSFs could apply for transitional CGT relief which provided temporary relief from certain capital gains that might result from members complying with the transfer balance cap rules, or the transition to retirement income stream (TRIS) reforms that began on 1 July 2017.

Transitional CGT relief was only available for 2016–17 and applied to certain CGT assets held by a complying SMSF at all times during the ‘pre-commencement period' which was from 9 November 2016 to 30 June 2017.

CGT relief is applied differently depending on the method used to calculate ECPI on 9 November 2016, as follows:

if you calculated your ECPI using the segregated method, the resulting gain or loss was entirely disregarded
if your fund used the segregated method on 9 November 2016 and switched to the proportionate method during the pre-commencement period or at the start of 1 July 2017, the resulting gain or loss was entirely disregarded
if your fund used the proportionate method throughout the pre-commencement period, the resulting gain could have been deferred (and the resulting loss carried forward under the ordinary rules)
if you changed from the proportionate method to the segregated method between 9 November2016 and 30 June 2017, you weren't eligible for CGT relief.

CGT relief was only available to an SMSF where a member made changes to reduce retirement phase income streams below the $1.6 million transfer balance cap, or members with a TRIS who were affected by the changes.

Example 8: SMSF eligibility for CGT relief

Assume that in example 1, the AXY SMSF has assets of $2,500,000. Member A (who is receiving a super income stream benefit) has an account balance of $1,700,000, and member B (who is still in the accumulation phase) has an account balance of $800,000.

The SMSF uses the proportionate method to calculate its ECPI and has been doing so for a few years. The property and shares have been held for more than 12 months and are post-20 September 1985 assets. In the 2017 year, the actuarial certificate shows that the fund's exempt proportion is 75%.

Fund asset
Asset	Cost base	Market value
Property	900,000	1,500,000
Shares	500,000	800,000
Cash	N/A	200,000

On 1 June 2017, Member A commutes $200,000 in shares from his retirement phase to the accumulation phase, to ensure he complies with the transfer balance cap.

CGT relief is available for both the property and shares as Member A needed to commute amounts out of retirement phase due to avoid exceeding the transfer balance cap.

Both assets meet the eligibility criteria for CGT relief because:

the assets were not segregated current pension assets at any time during the pre-commencement period
the fund held the assets for the entire pre-commencement period
the fund’s 2016–17 exempt proportion was greater than nil.

The fund elects to apply CGT relief to the property and shares, resetting their cost bases to their market values at 30 June 2017. The fund accrues capital gains for both assets that are not disregarded as is shown below:

Accrued capital gains for assets
Asset	Reset Cost Base/Market value	Capital gain	Discounted capital gain
Property	1,500,000	600,000	400,000
Shares	800,000	300,000	200,000
Cash	200,000	N/A	N/A

The fund wishes to defer the liability for the capital gains, so it calculates a ‘deferred notional gain’ for each asset by applying the 2016–17 exempt proportion of 75% to the discounted capital gains to determine the portion that would not be exempt:

property – deferred notional gain ($400,000×25%) $100,000
shares – deferred notional gain ($200,000×25%) $50,000.

The deemed CGT event or events have resulted in capital gains of $150,000. As the fund chooses to defer the capital gains, the capital gains aren't included on the 2017 SMSF annual return.

The fund will need to show that a CGT event has occurred in the SMSF annual return and report the amount on the 2017 CGT schedule. The gains are recognised in the year in which each asset is sold and reported in the SMSF annual return for that year. The gains may be reduced by capital losses made in the same year as well as carried forward losses.

In the CGT Schedule attached to the 2016–17 SMSF annual return, the fund selects ‘Yes’ at label 8F – Have you chosen to apply the transitional CGT relief for superannuation funds?’, and includes $150,000 at label 8G – ‘Notional capital gain amount deferred’.

The exempt income is 75% of the fund's assessable income of $160,000 – that is, $120,000

This would be shown on the SMSF annual return as follows:

The fund selects 'Yes’ (label G) – 'Did you have a capital gains tax (CGT) event during the year?’

Section B, Item 11 Income – example 8
Field	Value
Net capital gain (label A)	$0
Assessable contributions (label R)	$0
Other income (label S)	$160,000
Gross income (label W)	$160,000
Exempt current pension income (label Y)	$120,000
Total assessable income (label V)	$40,000

Note that you should also include ECPI in Section A label 10 A of the SMSF annual return.

End of example

Non-arm's length income and assessable contributions

When calculating the amount of ordinary income and statutory income of the SMSF that is exempt from income tax, non-arm's length income and assessable contributions are excluded from the calculation.

Record these income types in the SMSF annual return under the relevant income labels but don't include them when you calculate the SMSF's ECPI.

Generally, assessable contributions are contributions paid to an SMSF either:

on behalf of a member (such as super paid by an employer on behalf of an employee)
by a member who has claimed a personal deduction for those contributions.

Income is non-arm's length income (NALI) if the:

parties to a scheme are not dealing at arm's length, and either or both of the following applies
- income derived from the scheme is greater than might have been expected had the parties been dealing at arm's length in relation to the scheme, or
- from 1 July 2018, expenses (either revenue or capital in nature) associated with the scheme are less than, including nil, those which might have been expected had the parties been dealing at arm's length.

NALI also includes income such as private company dividends (including non-share dividends) and certain distributions from trusts.

Last modified: 12 Apr 2022QC 21546