CGT provisions: need to know
Self-managed super fund (SMSF) investors have a one-off opportunity to re-set their asset values prior to the $1.6 million transfer balance cap being introduced on 1 July.
The provision allows trustees to have the benefit of the tax-free exemption on the increase in value of the assets held in the fund to support pension liabilities right up until 30 June 2017.
Under new superannuation rules, from the start of the new financial year funds that are in pension phase may only have assets to the value of $1.6 million in the structure and receive tax-free status on the income and capital growth the assets produce.
This means trustees whose SMSFs have assets valued above $1.6 million may have to move some of these investments back into accumulation phase to meet the new provisions.
Peter Hogan, the Self-Managed Super Fund Association’s head of technical, notes that complexity arises because there are two ways the tax-free income and the capital gains tax relief under these one-off measures on the assets that support the pension are calculated under the Tax Act.
These are the segregated method and unsegregated or proportional methods. These are methodologies to calculate the amount of income within the fund that won’t be subject to tax because it supports a pension and are also used to apply the capital gains tax relief.
“If you use the proportional method, the cost base is reset based on the market value of the assets at 30 June,” says Hogan.
“If you use the segregated method, which is more complicated and available to funds wholly in pension phase, you can trigger an earlier date to use as your market value date to reset your cost base; for example, if you elect to move the excess back into accumulation phase earlier than the 30 June,” he adds.
Under the segregated method, it’s possible to reset the cost base on assets where the accrued capital gain which is deemed to be realised under the relief provisions is completely ignored for tax purposes. Any future gain calculated on sale of the asset in later years only picks up the capital gain based on the new reset cost base.
Using the proportional method, trustees can choose to include some of the deemed realised capital gain under the relief provisions in the 2016/2017 financial year, or defer paying tax on that deemed capital gain until the asset is actually sold by the SMSF in later years.
“You don't have to apply the capital gains tax relief if you don't want to; it’s an asset-by-asset choice. If the original purchase price is more than its market value at 30 June you can choose not to reset the cost base on that asset and instead use the original cost base,” Hogan explains.
“The first time you would choose not to apply the CGT relief is if the asset’s original purchase price is greater than its market value at 30 June,” he adds.
Another circumstance where you might choose not to use the CGT relief might be if you elect for your SMSF to actually sell an asset that is no longer required, on or before 30 June and claim the current exemptions available on sale of pension assets.
Another time you may not use it is when the fund is likely in the near future to have a higher proportion of the fund supporting pension liabilities which would result in a smaller capital gain being realised on disposal of an asset compared to the deemed gain percentage on that same asset in the 2016/17 financial year.
“On the other hand, you might choose to access the capital gains tax relief and include the deemed realised gain as assessable income this year if you can realise or have carry forward capital losses to apply against any gain.
Equally, the likely percentage of exempt proportion applied to assessable income in the 2016/17 financial year may be very high. Some funds might choose to go this way, include their deemed gains under the relief provisions and pay some tax this year, but not much,” says Hogan.
“Alternatively, you might have a big capital gain against which you don’t have any losses to offset. You would want to defer having to pay tax on that larger capital gain for as long as possible,” he adds.
In order to prepare for the 30 June/1 July transition, Hogan suggests trustees refer to the Australian Taxation Office’s (ATO’s) Practical Compliance Guide 2017/5.
“This document explains that the main obligation is for trustees to have received a request from the SMSF’s members, acknowledged by the trustees, that the member wishes to move excess pension funds above the $1.6 million cap back into accumulation phase.
“The calculation of the gain, and decisions about which assets to move around and which asset to apply the gain to, can be done at the time you do your annual accounts and tax returns,” he says.
SMSF trustees are advised to refer to the ATO’s Law Companion Guide 2016/8 for further information about how the capital gains tax provisions work in relation to the one-off capital gains tax relief available on assets currently supporting pension liabilities impacted by the 1 July 2017 changes.