By Graeme Colley

Not every investment makes a profit all the time. Nor did every SMSF reset its CGT cost base on 30 June 2017 for investments showing a notional capital loss. So, what happens if there is a realised loss in an SMSF?

Accessing losses in a pension-phase SMSF depends on whether the fund’s tax-exempt income is determined using the segregated or proportionate method (explained here).

Don’t forget, an SMSF that has at least one member with a total superannuation balance of more than $1.6 million as at 30 June in the previous financial year must use the proportionate method, which requires an actuarial certificate even if the fund is totally in pension phase.

Capital gains and losses from segregated pension assets

The income tax law says that any capital gain or loss in relation to a segregated pension asset is ignored. Such losses cannot be offset against capital gains associated with accumulation phase assets. Rather, losses can only be offset against gains where the all the assets are attached to the accumulation phase. Similarly, an excess of capital losses can be carried forward and offset against future taxable capital gains – provided all assets are associated with the accumulation phase.

Example 

Melinda and Luke are members of the Busy Bee Superannuation Fund. She is in accumulation phase while he has an accumulation account and is also receiving an account-based pension. The fund uses the segregated method to determine its taxable and exempt income.

During the financial year the fund sold some of its assets associated with accumulation phase, resulting in a capital gain and some capital losses. It made losses on assets used to support Luke’s pension.

In this example the net capital gain from accumulation phase – after applying capital losses and the one-third discount for capital gains – is $60,000 which will be added to the fund’s taxable income. However, the losses incurred from the assets supporting retirement phase are disregarded. 

Capital gains and losses for funds using the proportionate method

An SMSF that uses the proportionate method will need to factor capital gains and capital losses into the calculation. A net capital gain is added to the fund’s assessable income before applying the actuarial ECPI percentage for the tax year to work out how much income is taxable. Any net capital loss (an excess of capital losses over capital gains) can be carried forward until it is offset against future assessable capital gains.

An SMSF that uses the proportionate method to calculate its ECPI needs to follow a few steps.

1. Calculate the net capital gain from all assets
2. Calculate the capital gain, after any CGT discount, or loss for each asset disposed of during the income year which will include the amount the SMSF has deferred if the asset had its CGT cost base reset as at 30 June 2017
3. Total up the capital gains
4. Total up the capital losses from assets disposed of during the current year and offset against total capital gains from step 3 (Hint: consider applying capital losses first against “other capital gains” which are not subject to indexing or discounting; then apply it against indexed gains, before finally applying the loss against discounted gains)
5. If there is a remaining capital gain, offset any brought forward capital losses from prior years and again, consider the order of application of capital losses as in the previous step

Any net capital loss that arises is carried forward to the subsequent income year, with no application of the ECPI percentage. This allows the full amount of the capital loss to be offset against capital gains in that income year which will be prior to the application of the CGT discount and the ECPI percentage. Capital losses are not reduced by the net ECPI, as is the case with revenue losses.

Example

Michele and Tim are members of the Razor Strait Superannuation Fund. Michele is in accumulation phase and Tim is receiving an account-based pension from the fund. The actuarial ECPI% for this financial year is 60%. The fund has sold some assets during the year but unfortunately there were capital losses incurred of $160,000 but no capital gains. The capital losses will be carried forward to the next financial year to be offset against any future capital gains.

In this example the capital loss is not applied against the ECPI% but is carried forward for future use against any capital gains. If a capital gain arises in the next financial year it will be offset against the carry forward capital loss before applying the one-third CGT discount to the relevant assets.

To make sure capital gains and losses are determined correctly the starting point, just like so many other things these days, is based on how the fund calculates its taxable and tax-exempt income. Then it’s a matter of calculating the capital gain on the appropriate group of fund assets, applying discounts where relevant and then coming out with a net gain to be include in the fund’s taxable income or a net loss to be carried forward to future years.