Expert SMSF insights
CGT relief explained
By Mark Ellem
Transitional CGT relief is available for SMSFs affected by the new $1.6m transfer balance cap, or for SMSFs paying a transition to retirement income stream (TRIS).
With relief available, important decisions need to be made as we head towards 30 June 2017. These choices will have a direct effect on the amount of SMSF income tax paid in future years.
What is CGT relief in a nutshell?
The new CGT relief rule, which applies in particular circumstances, enables the cost base of fund assets to be reset to market value.
The intent of the new rule is to provide CGT relief on gains made before 1 July 2017, so as not to disadvantage fund members who are required to commute a pension due to the new transfer balance cap, or the TRIS tax changes.
Is my client’s SMSF affected?
There are two categories of SMSFs that will be affected by the CGT relief rule. Firstly, an SMSF that has at least one member with more than $1.6m in pension accounts across all superannuation funds, and where that member is required to commute some or all of their pension account in the SMSF to comply with the $1.6m transfer balance cap.
The second category is SMSFs that are paying a TRIS which commenced before 9 November 2016. New rules will remove a TRIS as a tax-free retirement account as from 1 July 2017. Consequently, income earned on fund investments used to support the TRIS will not be exempt from fund income tax.
How does it work?
As with a number of the new super reforms introduced, the CGT relief rule is quite complicated. Whether an SMSF can access the relief will depend upon whether it currently uses the segregated or unsegregated method for claiming ‘exempt current pension income’ (ECPI).
For SMSFs using the segregated method, there will be no CGT consequences of applying the relief and resetting the cost base of eligible assets to market value. Based solely on this outcome, it would almost be an automatic decision to reset the cost base (provided of course market value is greater than cost). However, this should be assessed on a case by case basis.
Are there any other consequences of making the choice to apply CGT relief?
Yes! In addition to resetting the cost base to market value, the date of acquisition for the purpose of applying the one-third CGT discount will also be reset. That is, you will re-start the 12 month holding period, which is required to apply the one-third discount. So, care needs to be taken where an eligible fund asset is planned to be sold within 12 months of resetting the cost base.
Should an SMSF make the choice?
As with most questions, the answer is “it depends”. You need to consider:
- What method is the SMSF using to claim ECPI?
- Which fund assets are eligible for CGT relief?
- Is the market value of the eligible fund assets more than the current cost base at the time of the re-set?
- Will the asset be sold or disposed of within 12 months of the date of the re-set?
- What is the ECPI percentage of the fund expected to be in the year the affected assets are sold?
It is important to note that the choice to reset the cost base and to defer any notional gain is an irrevocable election and must be made by the due date for lodgement of the fund’s 2016/17 annual return. So there are no “do overs” if you subsequently realise you got it wrong.
What should I do now?
You should first assess if you or your client’s SMSF has members that are affected by either the introduction of the $1.6m transfer balance cap or the change to taxation of TRIS generated income.
If impacted, you then need to assess the available options and which assets are eligible for CGT relief. Then it’s case of doing the calculations to assess the effect of choosing the relief and whether the fund will apply to the deferral.
With less than six months to 30 June 2017, decisions need to me made. Now is the time to weigh the situation with regard to the new CGT relief.
More about CGT relief
Stay ahead of the game. Know the best strategies and how the latest regulatory changes affect your SMSF compliance. Sign up for SMSF news and insights from Australia’s top experts. A must for advisers and accountants.
Receive regular insights from our experts
Please complete all fields