Topics on self-managed superannuation fund – SMSF (9)

Tax Tip: Understanding CGT and NALI Provisions

When a superannuation fund acquires assets under conditions that don’t meet the usual market standards—like buying at a discount or through an interest-free loan (known as a Limited Recourse Borrowing Arrangement, or LRBA)—the rules around Capital Gains Tax (CGT) get specific.

High Tax Rate for NALI Assets: Any profit (capital gain) from these assets is taxed at the highest rate of 45% as of the 2020 income year because they fall under the fund’s non-arm’s length component.

Pension Phase Considerations:

• Segregated Method: If the fund separates certain assets to cover retirement pensions, any gain from those NALI-affected assets won’t be exempt from CGT.
• Proportionate Method: If the fund calculates pension exemptions based on the total assets supporting the pensions, gains from NALI-affected assets can't be reduced proportionally.

Standard CGT Rules Still Apply: Despite these specifics, standard CGT rules apply, including the 33.33% CGT discount, if eligible. However, there's an exception for market value substitutions:

• Market Value Substitution: If a fund buys property below market value under a non-arm’s length deal, when sold, the gain is calculated using the property’s market value at the time of purchase, potentially lowering the gain.

Compliance is Key: Fund trustees must comply with superannuation laws, which generally prohibit buying assets from related parties. However, there are exceptions, like purchasing business real property and listed securities from related parties at market value.

For more details or if you have specific questions, contact Tax Ideas Accountants & Advisers at +61 2 83181545 or book an appointment through our online calendar.

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