There is still time for SMSF trustees to make the irrevocable election for capital gains tax relief, however this window is quickly closing. The ATO’s extended lodgement deadline of 30 June 2018 is less than 4 weeks away. SMSF trustees need to act now to ensure they don’t end up paying more tax than they should, and doing it wrong could cost you.
In working out the pros and cons of your fund electing to apply capital gains tax (CGT) relief on all eligible CGT assets, as a trustee, you will need to understand the CGT relief method that will apply in your fund’s situation and whether an election will be made.
CGT relief allows SMSF trustees to reset the cost base on assets impacted by the changes to the superannuation legislation commencing 1 July 2017. It provides temporary relief from certain capital gains that may arise because members need to comply with these changes. This applies to complying with the Transfer Balance Cap (TBC) of $1.6M and some transition to retirement income streams (TRIS) not in retirement phase (s294.100 Income Tax (Transitional Provisions) Act 1997).
The CGT cost base reset depends on whether the fund uses the segregated method or the proportionate method to calculate its Exempt Current Pension Income (ECPI).
The segregated method for CGT Relief applies where the fund has investments allocated specifically to pension and accumulation phases or it comprises 100% of pension benefits for the financial year.
If your SMSF has segregated pension and accumulation assets or consists only of pension phase assets, the SMSF trustees can reset the CGT cost base of the fund’s assets under s294-110 of the Income Tax (Transitional Provisions) Act 1997. This applies if:
- the fund had a CGT asset which was a segregated current pension asset as at 9 November 2016;
- an asset ceases to be a segregated current pension asset of the fund throughout 9 November 2016 until 30 June 2017 (the pre-commencement period);
- the fund held the CGT asset throughout the pre-commencement period;
- the fund was a complying fund from 9 November 2016 until it ceased to be a segregated current pension asset of the fund; and
- the trustee made an irrevocable election to reset the cost base of the CGT asset on or before the lodgement due date of the fund’s 2016/17 annual tax return.
The cost base of assets to be reset under this method can be made at any date during the pre-commencement period (9 November 2016 to 30 June 2017). However, the trustee cannot merely select any date they wish during this period, as the assets must cease to be segregated current pension assets (that is, the fund becomes proportionate as it has accumulation benefits).
Only two events can affect the cessation date:
- A contribution is made to the fund; or
- A partial commutation was made from a pension benefit.
Let’s say a contribution was made to the Fund on 20th June 2017, this contribution triggers the cessation date under s294-110 and is, therefore, the date the trustees can apply CGT relief as the assets cease to be segregated from this time.
Should the fund remain fully segregated for the full financial year but the trustees wish to reset the cost base of its assets at an earlier date, to comply, a partial commutation of the member’s pension benefit is required at that time to trigger the cessation date for application of CGT relief.
Once the CGT cost base of an asset is reset the fund can continue to use the segregated method or commence using the proportionate method. The proportionate method permits the trustees to reset the CGT cost base on any CGT assets in the fund (not just assets transferred to the accumulation phase under the segregated method). There may be some tax advantages of using the proportionate method over the segregated method in some situations and vice versa.
The notional capital gain arising under the segregated method is disregarded for tax purposes, as it is tax exempt (i.e. it was incurred at a time when the fund was in full pension mode).
If your SMSF consists of pension and accumulation benefits, the trustees can only use the proportionate method to reset the CGT cost base of all the fund’s eligible CGT assets on 30th June 2017 in compliance with s294-115 of Income Tax (Transitional Provisions) Act 1997.
|A note of caution: Where a fund is classified as being proportionate but converts to a fully segregated fund during the pre-commencement period (i.e. all Members benefits were put into pension mode during the pre-commencement period) then it will be ineligible for CGT relief.|
It is important to note that the CGT cost base date also resets to 30 June 2017 for the purpose of CGT discount when selling investments in the future that have had their cost base reset. That is, assets will have to be held for more than 12 months from the reset date to be eligible for the CGT discount.
A notional capital gain will arise under the proportionate method when the cost base is reset. Trustees have several options regarding the potential assessable notional capital gain that will arise when electing to apply the CGT relief under the proportionate method:
- The notional capital gain can either be deferred, or
- The notional capital gain can be brought to account as assessable income for the fund in FY2016-17.
By deferring the assessable notional capital gain, it is carried forward until the specific investment that has been reset is sold.
Future capital losses can be offset against the deferred notional capital gain which is an anomaly under the CGT legislation. It is normal to offset capital losses against gross capital gains first before discounting and applying the ECPI percentage.
However, any future capital losses are applied against the net deferred notional capital gain (after discounting and applying ECPI).
Should the trustees elect to bring the notional capital gain to account in FY2016-17 then normal capital gains tax calculations apply to calculate the tax outcome.
As there are less than 4 weeks to go, get your skates on if the CGT cost base reset is to apply to your SMSF, to save tax and ultimately provide more for members to live on in retirement.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.