CGT relief could be easier in an SMSF

3 min read

By Bryan Ashenden
Published in Australian Financial Review 29 March 2017.

With all of the super changes due to hit from 1 July 2017, there is one particular measure that seems to be causing a lot of concern. Interestingly, it is a measure that is of benefit to members and trustees, rather than a potential negative.

Perhaps this is why it’s even more important to understand and get it right.

When the Government first announced it was introducing a limit on the amount that can be transferred to the pension phase of super, a big issue for many members was what to do with the existing assets within their super fund. This issue arises whether you have more than $1.6 million in pension accounts or are running a transition to retirement income stream (TRIS), as the excess above $1.6 million or the entire TRIS needs to move back to accumulation phase with effect from 1 July 2017.

If you are already in one of these income streams, then right now you have the potential to sell any underlying assets that support those income streams and do so tax free – simply because the assets supporting pensions are currently within a tax free environment. Sounds simple right – sell the asset now and avoid any potential capital gains tax (CGT) concerns? Of course, things are never that simple.

From a market stability viewpoint, I don’t think anyone wants to see a sudden rush on the market leading up to 30 June where all of a sudden all super trustees are looking to sell their existing assets just to avoid CGT concerns. And in fact, doing it for this purpose is not only wrong, but could impact your retirement plans. The first question to always ask should be about whether you believe that the assets still have the potential to service your retirement needs, whether by capital growth or income return.

Conscious of the potential impact on markets, as part of its changes to the super laws, the Government also provided trustees (and therefore members) the potential to gain some CGT relief. The effect of this is to deem a sale and repurchase of the underlying assets within your fund, but without the need to actually sell. This allows the cost base of the asset to be lifted to its current market value, eliminate all (or some) of the capital gains that have accrued to this point in time, and avoid unnecessary transaction costs.

While this is all positive news, there is a fair amount of work to be done. In order to obtain this relief, excessive pension amounts (i.e. the amount above $1.6 million) and TRIS need to be restructured no later than 30 June 2017. 

But how much do you need to move, and how can you work it out by 30 June? And perhaps more importantly, how is it even possible to do this if you don’t know the value of the assets (and the excessive amounts) until after markets close on 30 June?

While this relief is available to all affected super members, this is where self-managed super funds (SMSFs) have a distinct advantage. The operation of a SMSF is largely driven through its effective administration. The SMSF owns all the assets of the fund, and they are then allocated to members and their respective pension or accumulation accounts. 

When it comes to the application of this possible CGT relief by 30 June 2017, the important requirement is to make a decision to move account balances in order to comply and to make this decision prior to 30 June. For SMSF trustees, the best evidence of the intent to do this is through a trustee resolution, appropriately documented, to show that the trustees want their pensions restructured with effect from 30 June 2017 so they are complying with the new rules when they commence the next day.

Because SMSFs are driven through their administration, when the administrators prepare the SMSF’s accounts for the 30 June year end, which they can only do when they have all the assets valuations as at 30 June, they can then adjust the accounts to reflect the trustee resolution. As an example, it would mean the accounts at 30 June reflect a new pension balance at a maximum of $1.6 million, with any excess reflected as an accumulation account. A TRIS would still be reflected as a TRIS (assuming it is to continue), but will be taxed differently from 1 July 2017.

The ability to claim the CGT relief does have a number of other requirements. The level of relief will depend on whether the SMSF operates on a segregated or proportionate basis. Segregation occurs where assets are physically allocated (or tagged) to particular accounts in the fund. As a result, all returns (capital and income) on those assets would go to those accounts. The proportionate approach (which is arguably simpler) applies where all assets are pooled and a percentage of each assets belongs to each account.

The choice of using a segregated or proportionate approach is one that your SMSF would already have made if you are running pensions. If you are unsure, you can ask your administrator. The easiest way to know is to look to the last tax return for the fund and ask the administrator if an actuarial certificate was required to work out the tax free status within the fund for pension accounts. If there is one, it means you are using the proportionate approach. If not, it means it’s segregated. Importantly, from 1 July 2017, many SMSFs will lose the ability to use a segregated approach for tax purposes due to a legislative change.

Finally, the ability to use the CGT relief is only available when the following have been met; where a choice has been made to do so by the time the SMSF is due to lodge its tax return for the year ended 30 June 2017, and the choice is made on an asset by asset basis.

There is a lot for SMSF trustees to consider about the potential application of this relief. The good news is that it doesn’t all have to be done prior to 30 June, but you also can’t afford to wait. The decision to use it needs to be made and evidenced before 1 July 2017. The paperwork will follow. You also need to decide the right assets to seek relief on, and which assets should move back to accumulation phase.

The best way to ensure you apply these rules correctly is to ensure you are getting the right advice from your professional support network. And it’s a great example of where you need your adviser, administrator and tax agent to be working well together to ensure the right decisions are made to support your retirement plans. If you don’t get it right, your future tax bills could be higher than needed.

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This information is current as at 08/052017. 

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. 

This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. Any tax considerations outlined in this article are general statements, based on an interpretation of current tax laws. Any such tax considerations do not consider your specific circumstances and do not constitute tax advice. As such, you should not place reliance on any such taxation considerations as a basis for making your decision. As tax implications of the can impact individual situations differently, you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser about any liabilities, obligations or claim entitlements that arise, or could arise, under a taxation law. 

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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.