New ATO guidance offers tips to SMSFs around selling assets
The ATO has issued a useful publication on CGT and a leading SMSF legal expert says it provides information for SMSFs about what to expect when assets are held outside of super.
Daniel Butler, director of DBA Lawyers said the guidance provides strategies which SMSFs and their advisers can and should consider.
“A lot of the information in this, if you asked a client, they wouldn’t know about it because software may already be doing the job for them,” he said.
“But our goal – and the ATO’s – is to educate people, so they can see what is happening in practice rather than trying to figure it out.”
The guidance, Capital Gains Tax on Shares and Units, outlines the CGT regime on the basic proposition of selling an asset and what you get for it.
“Basically it outlines if you sell it for more than you paid for it, you get capital gains,” Mr Butler said.
“But shares have a range of acquisition or dollar-cost averaging. For example, NAB shares one day trade at one price, down the track it’s another price.
“And in an SMSF you are more likely to have a diversified portfolio so when you sell, you should know what shares you are selling depending on when you bought them and how much you paid for then, and you can use the options in this guide to get the best tax conditions.”
The ATO confirms that there are three common ordering methods for parcel allocation when calculating CGT on shares:
- FIFO (first-in, first out), where the shares bought first are sold first, regardless of cost
- LIFO (last-in, first-out), where the shares bought last are sold first, regardless of cost
- HIFO (highest-in, first-out), sometimes also referred to as HCFO (highest-cost, first-out) – the most expensive shares bought are sold first, regardless of timing.
“A different method of parcel selection may be applied for each parcel of shares sold,” Mr Butler said.
“Most people use FIFO because it is the easiest to keep track of, however you can choose any of these three methods.
“It can make a big difference [for tax purposes] and because the costs differ people may want to be selective.
“For example, you may want to sell the higher cost shares to minimise CGT.”
Mr Butler said SMSF trustees also have some unique CGT twists that can also change the tax ramifications.
“Typically gains on assets are on capital rather than revenue account,” he said.
“Thus, a net capital gain realised on the sale of an asset will generally qualify for the general CGT discount under Div 115 of the ITAA 1997 provided the asset is held for at least 12 months.
“A super fund may be entitled to exempt current pension income (ECPI) where a pension is in retirement phase such as an account-based pension is being paid.
“The CGT treatment differs depending on whether the fund maintains segregated or unsegregated pension assets. Capital gains and capital losses are disregarded if segregated and a proportionate exemption is generally available in relation to unsegregated assets.”
The ATO CGT toolkit also outlines some taxpayers, including SMSF trustees, may be able to choose the indexation method if the asset was acquired prior to 21 September 1999, something Mr Butler said many trustees overlook.
“The ATO CGT toolkit also outlines, among other things the various ways a CGT event can occur apart from selling an asset including via a transfer of an asset,” he said.
“Naturally, an in-specie transfer by an SMSF trustee to a member would constitute a CGT event.
“It also talks about script-to-script rollovers where a gain can be disregarded where a share is disposed of as part of a corporate take-over or merger.
“And finally, the records that need to be kept. The ATO reminds people that records must be kept for at least five years after the disposal of the asset.”
The ATO CGT toolkit focuses on shares and units in managed investment trusts and outlines other factors that are important in complying with the CGT regime.
“In relation to an SMSF it is important to remember that shares, units in a unit trust, real estate or an option in respect of one of these assets acquired after 10 May 2011 cannot constitute trading stock even if the SMSF trustee is an active share trader or property developer,” Mr Butler said.
“The CGT rules are the primary code for taxation of superannuation funds subject to certain exceptions such as FX gains and losses and gains and losses on certain securities.
“Naturally expert tax advice should be obtained as and when needed.”
