Tax Tip 359: All SMSF assets Generally Held on Capital Account

Where land or shares are held with the purpose of reselling at a profit the profit on the sale will be taxed as income and not capital gains tax, section 6-5 ITAA97.


Example someone buying and selling shares in quick succession is not doing it for the intention of investing, but they are trading and it would be taxed as income (which would generally result in the same as them being on capital account and held for less than 12 months, but it could not be used to offset capital losses)


Another example is development of property. A SMSF can develop property and it would be taxed as capital gains and not income.

But this rule does not apply to superfunds, for most but not all assets, because of specific legislation.

Section 295-80 ITAA97 deems assets held by a SMSF to be on capital account.

See INCOME TAX ASSESSMENT ACT 1997 - SECT 295.85 CGT to be primary code for calculating gains or losses

 

I recall the EM to that law and why it was needed. Many funds engage in active trading and it could easily be argued that trading was revenue in nature. Ironically we are dealing with trivial variance in tax rates eg 15% v 10%. Also general tax law treated currency gains and losses as oridinary income. Many funds invest in foreign currecy denominated assets. The very heart of superannuation law says a fund assets will be "investments" so whether traded or held passively this doesnt change. The presumption of capital account is a clarrifying law.

This provison can be misread too. It does not mean ALL income arising from property is a capital gain. It merely says it is the primary code. That said, the ATO can still classify income as "non arms length income" where the income is produced on revenue account and is greater than it should otherwise be. and
s295-80(2) except "ordinary income" and profit making. This is where development profits need to bee consistent with a fixed right to a share of that income resulting from use of a fund asset as an investment.

One of the features of our super system is most penalties are reflected in tax law. eg If a fund were to allow its land for use in a development and others assist and are involved and the fund receives a greater share of profit that it should the NALI provisions (s295-550 ITAA97) apply and impose tax at 45%. Otherwise, a share of development profits could also be ordinary income and taxed at 15%.

I dont agree with the general view that : A SMSF can develop property and it would be taxed as capital gains and not income. ....as it wont always be the case. The ATO recently issued a bulletin as regulator on this issue approx a year ago : https://www.ato.gov.au/law/view/document?DocID=SRB/SRB20201/NAT/ATO&PiT=99991231235958

Tip : get very comprehensive tax advice prior to acting. Once the limits are understood many issues can be specifically planned and allowed for.