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How to get CGT rules right

The first part of the decision-making process is around whether it will make sense is to determine whether the taxable income of your fund is determined on a segregated or unsegregated basis.



Short-term capital gains tax relief provisions are presently in place to help self-managed super fund (SMSF) investors transition to a new regulatory regime that came into force on 1 July this year.

As a result of these changes, super fund members who had at least $1.6 million in pension phase or were receiving a transition to retirement (TTR) pension on 30 June 2017 can be eligible to reset the CGT cost base of investments.  From 1 July 2017, the changes restrict the maximum value that can be transferred to retirement phase to $1.6 million and receive beneficial tax exempt treatment. 

If the fund qualifies for CGT relief, SMSF trustees can reset the cost base of the fund’s investments. This allows the fund to use a higher cost base for CGT purposes. 

When the assets’ values have been reset and eventually sold, the values are adjusted so they are tax-exempted for the period the assets have been supporting pensions.  This applies if the asset has been held throughout the period commencing on 9 November 2016 until 30 June 2017. 

First steps


It won’t necessarily make sense to re-set the cost base of all assets for CGT purposes.  As a general rule, assets which have notional capital gains may benefit from the CGT cost base reset, whereas those that have notional losses are less likely to benefit from the reset.  To work out whether a reset of the CGT assets is worthwhile there are a number of steps to be taken. 

The first part of the decision-making process is around whether it will make sense is to determine whether the taxable income of your fund is determined on a segregated or unsegregated basis.

If the fund is treated as an unsegregated fund, the trustees can reset the CGT cost base of the investment as at 30 June 2017.  In addition, the taxable part of the notional capital gain or loss can be included in the fund’s taxable income in the 2016/17 financial year or deferred until the investment is sold in the future.  

If the fund is treated as a segregated fund, the trustees can use a value for CGT cost base reset purposes at any time between 9 November 2016 and 30 June 2017.  However, a segregated fund does not have the option of deferring the capital gain or loss to the year in which the investment is sold.

SMSF trustees have until they need to lodge their annual tax return, usually by May next year, to decide whether to elect to reset the cost base of the CGT asset.

Although that’s some time away, now is the time to start thinking about the right decision for your fund.

A good example is a superannuation fund partly in accumulation phase and partly in pension phase as at 30 June. 

If the intention is for the fund to be totally in pension phase in a few years, in those circumstances it may not be worthwhile resetting the cost base because once fully in pension phase, capital gains will be tax free.

The underlying investments’ performance is other consideration when deciding whether to take advantage of the short-term CGT provisions. 

Let’s say the investments in the fund show a notional capital gain up until 30 June this year. But down the track in a few years the investment may end up showing a loss when it is sold. In that case paying a capital gain prior in earlier years may have left the fund worse off.

Guidance


When the new rules became law, it was indicated that for superannuation funds that show a notional gain on 30 June 2017, it may be worthwhile to reset the cost base.

But if the investment shows a notional capital loss as at 30 June, it's probably not worthwhile resetting the cost base because the cost base of the investment will be less than its original purchase price.  Therefore, any subsequent increase in the investment may result in a greater capital gain than if the CGT cost base had not been reset.

If the fund resets the cost base of an investment, it won’t be able to take advantage of the one-third capital gains tax discount for the first year after the reset. So take that into account if you're thinking of selling assets. 

Avoiding errors


There are a number of common mistakes trustees could be making around the temporary CGT provisions of which they should be aware.

In some instances, a fund member may nominate a particular pension to be commuted to reduce the amount in pension phase to $1.6 million before 30 June 2017, but decide to take any excess out as a lump sum and start another pension.  This could deny the fund access to the CGT cost base reset. 

We’ve also seen SMSF members nominate assets to have their value reset that in reality are not eligible as they are not capital gains tax assets.  Corporate bonds, term deposits, and bank accounts are examples. They may have a market value but because they're not CGT assets the cost base cannot be reset. The major assets that can be reset include listed and unlisted shares, units in unit trusts, listed or unlisted, and property. 

Finally, I would like to point SMSF trustees to a transitional rule that applies until 31 December this year. As superannuation funds transition to the $1.6 million transfer balance cap, a member is allowed to have up to $1.7 million in pension phase as at 30 June, and only need to make the adjustment to reduce the value of the assets in the fund down to $1.6 million by the 31 December, at which time they must make the appropriate adjustment. 
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