There are two key requirements underpinning the transitional capital gains tax (CGT) relief provisions that are part of the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 that became law late last year, according to Peter Hogan, SMSF Association head of technical, who will address attendees at the SMSF Association Technical Day today.
The provisions require trustees to act in order to comply with the reforms to the transfer balance cap (TBC) or the transition-to-retirement income stream (TRIS), which took effect on July 1, 2017, and to lock in unrealised capital gains accrued on pension assets no longer able to support retirement phase income streams from July 1, 2017.
There are two basic eligibility conditions for a self-managed super fund to access the CGT relief: The fund has to be compliant in 2016-17 and be in the pension phase. There are four CGT relief that express the point – two where SMSF trustees are ineligible and two where they are eligible.
In the former case, members who have only an accumulation account or an account-based pension (ABP) that is less than $1.6 million will be ineligible, while members with an ABP that exceeds $1.6 million or a TRIS will be eligible.
On the issue of accessing the CGT relief where an SMSF has used the segregated asset approach to pensions, Hogan explains that there are three options available in 2016-17.
SMSF trustees can opt to continue using the segregated method, they can adopt the proportionate method and get an actuarial certificate, or they can choose not to apply for relief.
If they continue using the segregated method in 2016-17, the SMSF trustee identifies specific segregated current pension assets to re-characterise as a ‘segregated non-current pension asset’. For ABPs and 100 per cent pension funds, this means transferring specific assets from a pension account to an accumulation account. However, there is no need to transfer assets for segregated TRIS.
Trustees can then elect to apply CGT relief only to the specific assets re-characterised. If trustees go down this path, then an asset’s cost base is reset at market value, the capital gains discount period is reset, and any capital gain or loss is disregarded.
If adopting the proportionate method, trustees choose to pool together all pension and accumulation accounts, and all assets are no longer segregated current pension assets. Trustees can then elect to apply CGT relief to all or some of the assets, the relevant asset’s cost base is reset at market price, the capital gains discount period is reset, and any capital gain or loss is disregarded.
For non-segregated pension assets, there are also three options open to trustees: to pay tax on notional capital gain in 2016-17, to defer tax on notional gain until the year in which the asset is sold, or not to apply for relief.
Under the first option, trustees are required to get an actuarial certificate, their fund’s overall assessable income is determined by their exempt current pension income (ECPI) percentage, and they can utilise any deemed capital losses.
Under the second option there are the following ramifications:
The ECPI percentage used to determine assessable income cannot be applied to deferred capital gain
No further capital gains discount applies to deferred gain
Trustees cannot defer a deemed capital loss
Trustees are required to get an actuarial certificate
The fund’s overall assessable income is determined by ECPI percentage
At time of sale, any capital losses the fund has can offset the deferred gain.