By Bryan Ashenden
Published in Australian Financial Review 30 January 2017.
With all the changes to super that come into effect from 1 July this year, one of the less understood measures, but perhaps more important measures, is the potential ability to reset the cost base of existing super assets.
When you reset the cost base the asset’s value is changed to its market value, which means you can quarantine unrealised capital gains.
The fact it is less understood is not surprising, because arguably it’s one of the more complex changes and is time-bound in its application. But its importance in a self-managed super fund (SMSF) environment should not be overlooked. It could be more complicated to action in an SMSF than a retail super fund (which can also access the same relief), but the benefits to SMSFs could be considerable larger.
If you are wondering why the Government (and therefore the ATO) is giving this relief, it saves a lot of otherwise difficult situations arising. And simply, it would have caused gains to arise purposely by legislative change that members had no control over. Under the new rules, if you currently have a super pension valued at more than $1.6M, you will be required (or forced) to move the excessive amount back to accumulation. If you have a transition to retirement pension in place, from 1 July 2017 it’s earning (and realised gains) will taxed as if you are in accumulation.
When first announced, there was a view that in order to reduce future capital gains tax liabilities within a super fund it would be a good idea to sell assets and purchase replacement assets before 1 July 2017. In other words, do it now whilst the tax free status on the earnings within super pension accounts still exists. The CGT relief provided under the legislation means this action isn’t necessary, and avoids transaction costs and potential time out of the market. And this is a benefit to all.
As with many changes, there are nuances and qualification criteria to be aware of. The first is that that relief is only available if the asset was already owned by the fund on 9 November 2016 (the date the relevant changes were introduced to Parliament). Assets purchased after that date don’t get this relief. Similarly, the asset would still be owned by the fund after 30 June 2017, which makes sense because if sold before 1 July 2017, the existing tax rules could already exempt any gain realised.
The next question is “which assets do you apply the relief to?” The relief is not automatic, and needs to be chosen and applied on an asset by asset basis. This is important for a number of reasons.
First, the relief works by changing the cost base of the asset to its current market value. This makes sense and is logical if the asset has risen in value. However, if the asset has fallen in value, then resetting the cost base means you could lose the benefit of unrealised capital losses into the future.
Second, the way your fund currently operates could affect your choice because of future consequences. If your fund operates on a segregated basis (that is, you can identify all the individual assets that as a collective support your pension) then the cost base is simply reset. If your funds on an unsegregated (or proportionate) basis, which means it’s a part of all or some assets that support your current pension, you can reset the cost base, but a portion of the unrealised gain is deferred and tax is paid on that amount when the asset is ultimately sold.
Third, the relief is intended only to apply to the extent necessary to comply with the new rules from 1 July 2017. This will cover assets supporting transition to retirement pensions as they are impacted in full. But if you have super pensions in place that are below $1.6M, or you try to apply the relief to assets that take your balance in pension back below $1.6M, then the ATO may seek to apply its anti-avoidance provisions and associated penalties as there is no reason for needing to seek relief.
The final question, and perhaps most relevant, is “when do you apply the relief?” The relief is only available if you choose it and voluntarily restructure assets to support the new rules. This means you need to restructure necessary assets by 30 June 2017. In most cases, I expect 30 June 2017 will be the date the relief will be applied as funds will need to get market valuations of assets anyway, and leave assets in their current tax exempt environment for as long as possible.
Market conditions before 30 June could give rise to an opportunity to have assets reset at a higher cost base, but this does mean assets will be in accumulation earlier. If you have brought an existing pension down to $1.6M balance before 30 June 2017, you would still need to ensure it remains below that level at 30 June or may need to restructure the pension again.
There is no doubt that this is a complicated area, but the benefits to be gained are real. Careful planning is required to ensure you don’t miss out on the opportunity and the right assets are chosen for this relief to apply to. The best advice in this situation is to start the work earlier with the professional advisers to your fund to help ensure you get the best possible outcome. After all, it’s your retirement funding we are talking about.
This information is current as at 08/05/2017.
The information provided in this article is general in nature and does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.
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Superannuation is a means of saving for retirement, which is, in part, compulsory. The government has placed restrictions on when you can access your investment held in superannuation. The Government has set caps on the amount of money that you can add to superannuation each year on both a concessional and non-concessional tax basis. There will be tax consequences if you breach these caps. For more detail, speak with a financial adviser or visit the ATO website.