The 2016 Federal Budget’s superannuation reforms were legislated last week, so the uncertainty surrounding these new changes has lifted. This development provides a sense of relief to accountants in Sydney and removes any ambiguity surrounding the recent changes.
Among these new laws is the provision of Capital Gains Tax (‘CGT’) Relief. This allows the cost base of assets to be reallocated from the pension phase back to the accumulation phase to comply with the $1.6m transfer balance cap rulings.
What is the $1.6m transfer balance cap?
The $1.6m cap limits an individual can transfer into the pension phase from 1 July 2017. Any excess amount will be maintained in an accumulation account (where earnings are taxed at 15%). If this applies to you, or any other member of your superannuation fund, financial advice should be sought now, well before 30 June 2017, to allow sufficient time to plan for this measure.
What is CGT Relief?
Currently, any Capital Gains incurred on the disposal of assets that support a pension – whether an Account Based (‘ABP’) or Transition to Retirement Pension (‘TTR’) – are exempt from tax. However, the new rules no longer allow for income tax exemptions relating to TTRs and the $1.6m transfer cap from 1 July 2017 – this will limit the CGT exemptions to funds from advancing, hence the introduction of the CGT Relief.
Under the CGT Relief rulings, from 9 November 2016 to 30 June 2017, superannuation funds will now be able to ‘reset the cost base’ of assets reallocated from the retirement phase to the accumulation phase.
Two forms of CGT Relief are available depending on whether the fund adopts a ’segregated’ or ‘unsegregated’ asset accumulation method within the self-managed fund (‘SMSF’). These methods are also known as the ‘proportionate’ or ‘actuarial’ methods.
Segregated Funds
The segregation method will not be available to funds with at least one member in the pension phase with a total superannuation balance of more than $1.6m (across all funds they are a member of) from 1 July 2017.
Unsegregated Funds
Under the legislation, an SMSF Trustee may elect to obtain CGT Relief to reset the cost base of an asset to its market value as of 1 July 2017. The following prerequisites apply:
- The fund must calculate a notional gain on the proportion of the asset that is effectively attributable to the accumulation phase as of 30 June 2017;
- If not deferred, the fund must add this notional gain to its net capital gain (or loss) for the 2017 financial year, which effectively crystallises the tax liability that would have arisen if that asset had been sold in the 2017 financial year;
- The deferred notional gain can be carried forward indefinitely or until the sale date.
Can you elect which assets have their cost base reset?
Yes, this election may be applied on an asset-by-asset basis. However, the fund must have held the relevant asset on 9 November 2016.
When does the election to reset the cost base need to be made?
On or before the tax return lodgement due date for the fund’s 2016/17 income tax return, and will be irrevocable.
When does the election to defer the CGT from the cost base reset need to be made?
The election to “opt-out” to pay the tax until the asset is sold must be made in the 2016/17 income tax return.
Example
Joy and Peter have an SMSF, and their superannuation balances are $1.8m each as of 30 June 2016, of which 95% support their respective Account Based Pensions. The fund’s assets have always been unsegregated and include the following:
- Shares in company XYZ that were bought in 2010 for $500,000
- The shares are expected to have a market value of $2m on 30 June 2017, resulting in an estimated ECPI of 70% (as a result of both members will exceed their $1.6m Transfer Caps)
- The shares are expected to be sold for $4m on 30 June 2020
Option 1: Cost base reset and election to defer
If the Trustees chose to apply for the CGT Relief, then in the 2020 financial year, the fund’s assessable income would increase by $475,000 as follows:
- Deferred notional gain: the fund’s assessable income would increase by $75,000 (being the $2m – $500,000) x 5% plus
- Current year gain: $400,000 ($4m – $2m) x 2/3 x 30%.
Option 2: Cost base reset and no deferral election
Should the Trustees decide to reset the cost base but not defer the CGT on the reset, the same amount of assessable Capital Gain is declared. However, it is split across two years – $75,000 in the 2017 financial year and $400,000 in the 2020 financial year.
Kreston Stanley Williamson Team
*Correct as of December 2016
Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
