SUPER CHANGES

5 June 2017

TRANSITIONAL CGT RELIEF EXPLAINED

By Paul Nicol

Following on from our email last week explaining the impact of the $1.6 million pension transfer balance cap (“TBC”), this article focuses on the transitional CGT relief available to those impacted by the $1.6 million transfer balance cap and those with Transition to Retirement (TTR) pensions.

The transitional CGT relief provisions allows a superannuation fund, subject to eligibility requirements, to reset the cost base of an asset to its current market value.

The purpose of transitional CGT relief is to preserve the tax free status which applies to assets supporting pensions with accrued capital gains, where those gains would otherwise become taxable from 1 July 2017 due to:

• A member needing to commute their pension and transfer benefits to the accumulation phase due to the introduction of the $1.6m pension TBC or
• The changes to the taxation of assets supporting TTR income streams.

The transitional CGT relief provisions have the following characteristics:

• They only apply to certain assets held at 30 June 2017, where those assets were first owned by the fund on or before 9 November 2016;
• Will allow the cost base for CGT purpose of each asset to be reset to its market value as at the reset date;
• The cost base reset will not occur automatically. The fund trustee must make an irrevocable election to reset the cost base of an asset in an approved form;
• The election must be made on or prior to the lodgement due date of the fund’s 2016-17 annual tax return; and
• The election can be made on an asset by asset basis.

SMSF trustees now have a window to consider what actions are required to be taken before 30 June 2017.

There are two methods under which CGT relief can be applied:

1. Segregated method

The CGT relief is only available to assets that stop being segregated pension assets at any time between 9 November 2016 and 30 June 2017 in order to comply with the $1.6 million TBC by 1 July 2017. Note that the dates are critical as assets must be segregated pension assets on 9 November 2016 for the CGT relief to apply.

For each qualifying asset, an SMSF trustee can elect to reset the cost base to the market value at the time it stops being a segregated pension asset.

2. Unsegregated or proportionate method

One of the key differences between the CGT relief under the segregated method and the proportionate method is that under the latter, it is not necessary for the fund to be partially in pension mode before 9 November 2016. CGT relief is available to funds that have assets partly in pension phase and partly in accumulation phase before 30 June 2017.

Note that the CGT relief applies at the fund level, i.e. for a qualifying fund, it applies to all fund assets that have not been subjected to segregation. An SMSF trustee can elect to reset cost bases to their respective market value on 1 July 2017.

The other key difference of applying the CGT relief under this method is that there will be a CGT consequence in the form of an assessable notional capital gain. This capital gain is essentially the proportion of the capital gain accrued on assets before 1 July 2017 that are attributable to the accumulation phase. The SMSF trustee can elect to include this gain in the 2017-18 tax return or defer it until the assets are sold.

12-month period for the CGT discount will be reset under both methods.

Conclusion:

It is very important to note that the CGT relief will not apply automatically. Instead, an eligible super fund must elect to apply the CGT relief on an asset by asset basis by the time the fund’s annual return for the 2016–17 year is due.

This is a very complex area which needs specialist advice. We recommend you are proactive with your adviser to ensure (if eligible) you are applying the transitional CGT relief.

Paul Nicol
Senior Partner
Senior Financial Planner
SMSF Specialist Advisor™
Authorised Representative No. 230876

If you have any questions or comments, please email me at paul@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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