Capital Gains Tax relief for superannuation funds

by Helen McPhee Manager Helen has 9 years’ experience in advising families, private clients and their operating businesses on superannuation. Helen specialises in superannuation regulations as well as taxation compliance. She is also actively involved all areas of SMSF’s including initial set up, contribution, pension and investment rules, compliance work, audit issues and streaming of superannuation benefits. Contact Helen

The Australian Taxation Office has released guidelines on the Transitional Capital Gains Tax (CGT) relief available to superannuation funds needing to comply with the new $1.6 million pension cap and recent changes to the transition to retirement rules.

What do the Transitional CGT Rules mean?

When the $1.6m pension cap comes into effect on 1 July 2017, superannuation funds will be required to shift some assets from supporting pensions (which generate tax exempt capital gains) to accumulation phase, subjecting them to capital gains tax on sales post 30 June 2017.

In light of this, the government has introduced a one-off rule, giving superannuation funds the choice to reset the cost base of capital assets to market value, thereby reducing any unrealised capital gains. Allowing assets that will no longer be classified in pension mode to have their cost base reset to current market value means that when these assets are realised, the CGT, which would have been nil under the old rules, will be minimised.

In order for these rules to apply, you must be in pension mode, with either a Transition to Retirement Pension income stream (TRIS) of any value or an Account Based Pension (ABP) valued over $1.6m. This is an ‘opt in’ choice available in the 30 June 2017 year only, it cannot be revoked once made. The choice will be recorded in the 2017 SMSF tax return.

Do you need to apply the CGT Transitional Provisions?


What information is needed?

In order to ascertain how the Transitional CGT Rules will apply to your super fund, you will need:

  • details of all capital assets held by your fund at 9 November 2016 and still held at 30 June 2017, showing their CGT cost base
  • date, amount and type of contributions made to the fund since 1 July 2016.

The date the contributions were made will be very important in determining which rules apply to your fund and how the following tests will be applied.

Segregated or proportionate method

Your fund’s specific circumstances will dictate whether the rules are applied using the segregated method or the proportionate method. Only assets held from 9 November 2016 to 30 June 2017 can receive a cost base uplift. Assets that are purchased or sold during this period will not be subject to the uplift.

Segregated method

Used where the fund is 100% in pension mode or specific assets are supporting pension accounts and accumulation accounts.
Only assets supporting pensions in excess of $1.6m can have their cost base reset. The date to which the reset date will apply will depend on a couple of factors, such as if a contribution was made after 9 November 2016 or a commutation was made between 9 November 2016 and 30 June 2017. The ‘deemed’ gain will be exempt from tax, as the asset was in pension mode prior to the deemed sale. The fund can choose to continue to segregate its assets up to 30 June 2017 otherwise choose to adopt the proportionate method. From 1 July 2017 SMSF’s can no longer be segregated if a pension member has a total super balance above $1.6m.

The proportionate method

Used if the fund has a mixture of pension and accumulation member accounts and all assets are pooled in the fund.
Any or all assets can opt in to have their asset cost base reset to market value at 30 June 2017. There is no choice of date for this method. An actuary report will be required to apply the tax exempt proportion of the capital gain. The “deemed’ gain will either be recorded in the 2017FY (carry forward losses can be applied to the gain) or carry forward the gain to the year when the asset is realised (carry forward losses cannot be applied and deemed losses cannot be deferred)

Please note that applying the CGT relief provisions means that the CGT date for discounting to apply on an asset will also reset. Therefore any asset sold within 12 months of having its cost base reset will lose the CGT 1/3 discount on the sale.

Things to consider

  • Does your fund have a property – a current valuation will need to be obtained to uplift the cost of this asset.
  • Does your fund have unlisted shares or units – consider how a valuation will be obtained for these unit trusts and companies.
  • Contributions during the 2017FY – if your fund is 100% pension mode, timing on when the contribution is made will determine the reset date. It may be prudent to check with Mutual Trust before making your contribution.

Mutual Trust Pty Ltd ACN 004 285 330 (AFSL 234590). Liability limited by a scheme approved under Professional Standards Legislation. For participating members (other than for the acts or omissions of Australian Financial Services Licensees). This information is general in nature and subject to change. It does not constitute tax, legal or financialadvice. We recommend you seek advice specific to your circumstances before taking any action. Copyright © 2014 Mutual Trust Pty Ltd.
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