Capital gains tax transitional relief – the facts.

Home / Business Advisory Archives / Capital gains tax transitional relief – the facts.

By Brett Griffiths

brett griffiths

As part of the superannuation changes introduced with effect from 1 July 2017, your self-managed superannuation fund has the ability for Capital Gains Tax (CGT) relief if:

  • One or more of the members has a Transfer Balance Cap greater than $1.6 million in pension phase; or
  • One or more members of the Fund has a Transition to Retirement Income Stream.

CGT relief only applies to certain CGT assets held by the Fund throughout the ‘pre-commencement period’, being from 9 November 2016 to 30 June 2017.  It is applied on an asset-by-asset or parcel-by-parcel basis.

The object of the CGT relief provisions is to provide temporary relief from certain capital gains that might arise as a result of complying with these new reforms.

The CGT relief provisions seek to preserve the exemption for unrealised gains that accrued during the period when, if the relevant assets had been disposed of, the gains would have been exempt in the fund.

The mechanism used to reset the cost base of a CGT asset to its market value is to deem a sale, followed by an immediate repurchase of the asset.  The deeming only applies for the purposes of the CGT provisions.

This leads to a capital gain or loss arising at the time of the deemed sale.  That gain or loss is entirely disregarded for segregated current pension assets (that is, where the Fund’s members are in full pension phase or the assets of the Fund have been set aside for the sole benefit of the pension paid by the Fund). This is known as the “segregated” method.

Capital gains are partly disregarded for unsegregated assets under the “proportionate” method, and may be deferred until the asset is actually sold.

The deemed repurchase results in the Fund becoming the owner of the asset ‘again’ at the repurchase time, for the purposes of the CGT regime.

To qualify for the CGT discount on the eventual disposal of the asset, the Fund will need to have owned the asset for at least 12 months starting from the deemed repurchase time.

It is important to note that the CGT relief is not automatic.  An irrevocable election must be prepared and lodged as part of the Fund’s 2016-17 income tax return.  This lodgement must occur prior to the due date of the return*.

A Fund will need to keep appropriate records for the assets subject to CGT relief, and the exempt portion of any deferred capital gain, in accordance with the record keeping requirements in the CGT regime.  Records need to be maintained to ensure that capital gains or losses on the subsequent realisation of these assets can be accurately determined.

*This measure is only available for the 2017 financial year.

Example One

Tina and Adam are members of their SMSF, worth $2.5 million.

Both Tina and Adam receive a pension from the Fund, with the value of Tina’s superannuation interest supporting her pension being $1.8 million, while Adam’s superannuation interest is $700,000.

 Cost baseMarket value at cessation time
Asset A$100,000$900,000
Asset B$300,000$400,000
Asset C$200,000$400,000
Asset D$50,000$500,000
Asset E$280,000$300,000
Total930,0002,500,000

By electing to utilise the CGT relief measure, the assets are deemed to be disposed of and re-acquired for their market value.

As both Tina and Adam’s superannuation interests were paying a pension, the Fund is deemed to be segregated. Prior to the changes, the Fund would not have paid tax on the sale of the assets.

Under the new rules, Tina’s pension account must be $1.6 million as at 1 July 2017, meaning $200,000 is rolled back to an accumulation account. The effect of this is that 8% of the Fund is in a taxable environment ($200,000 over $2.5 million).

Should they choose not to utilise the CGT relief, and the assets are sold in July 2017, the Fund will pay capital gains tax on 8% of the $1.570 million gain.  As the CGT discount applies, $12,560 would be payable.

If the Fund had applied the CGT transitional relief, then no tax would have been paid, resulting in a $12,560 tax saving.

Example Two

Tina and Adam are members of their SMSF, worth $2.5 million.

Tina receives a pension from the Fund, with the value of her superannuation interest supporting the pension being $1.8 million.  Adam’s superannuation interest is in accumulation $700,000.

 Cost baseMarket value at cessation time
Asset A$100,000$900,000
Asset B$300,000$400,000
Asset C$200,000$400,000
Asset D$50,000$500,000
Asset E$280,000$300,000
Total930,0002,500,000

By electing to utilise the CGT relief measure, the assets are deemed to be disposed of and re-acquired for their market value.

As only Tina’s superannuation interests where paying a pension, the Fund is deemed to be unsegregated and must use the proportional method.  Prior to the changes, the Fund would have paid tax on 28% ($700,000 on $2.5 million) of the sale of the assets.

Under the new rules, Tina’s pension account must be $1.6 million as at 1 July 2017, meaning $200,000 is rolled back to an accumulation account. The effect of this is that now 36% of the Fund is in a taxable environment ($900,000 over $2.5 million).

Should they not elect to utilise the CGT relief, and the assets are sold in July 2017, the Fund will pay capital gains tax on 36% of the $1.570 million gain. As the CGT discount applies, $56,520 would be payable.

If the Fund had applied the CGT relief, then a deferred tax liability equal to 28% of the Fund would have been created as at 30 June 2017, equal to $43,960. When the respective asset is sold, the deferred capital gains tax would need to be paid.

If you would like to know more about Capital Gains Tax, please contact Brett Griffiths our Superannuation Advisory Director for assistance.

An Important Message

While every effort has been made to provide valuable, useful information in this publication, this firm and any related suppliers or associated companies accept no responsibility or any form of liability from reliance upon or use of its contents.  Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only.

 

 

Related Posts
Road Transport Operators