Only one partner in an SMSF will be able to access CGT relief if they move an asset to another fund during a separation, raising the need for carefully structured arrangements.
Separating couples with an SMSF should be aware only one of them will receive any capital gains tax (CGT) relief on an asset that is moved to another fund, potentially creating a future tax burden for one of the parties.
DBA Lawyers director William Fettes said the application of CGT relief in regards to an asset rollover meant any capital gain or loss was disregarded and the two members ended up in different situations in regards to future liabilities.
“While the gain or loss is disregarded, the transferee’s fund gets an inherited cost base in relation to that CGT asset, which means the transferor fund has no tax liability in relation to any unrealised gain on that asset,” Fettes said during a recent briefing hosted by the law firm.
“The sting in the tail for the departing spouse is they have an asset with a bigger CGT profile on it moving forward.”
He pointed out relief was available for assets rolled over as an ‘own interest’ under family law orders – in comparison to a payment split under the Superannuation Industry (Supervision) Regulations – and this was laid out in section 126-140(2A) of the Income Tax Assessment Act 1997.
“Under this section, an individual will no longer have an interest in the first fund after the transfer and [the relief will apply] if there has not already been CGT rollover relief in relation to the transfer of another CGT asset for the benefit of the spouse or former spouse,” he said.
“What do I mean about the relief not already being accessed under the own interest rollover relief?
“This concept is mean spirited, but it is important to appreciate what’s going on because when the own interest rollover relief was brought in, the explanatory materials made it clear the rollover relief was only available for one spouse, not two.”
Pointing to section 126-140(2A)(g) and the explanatory memorandum to Tax Laws Amendment (2007 Measures No 5) Act 2007, he highlighted it stated only one spouse needed to move their personal superannuation interest for a clean break to be achieved.
“That is how parliament conceptualised the relief, but there’s certainly situations where both parties might want to move their super to a different fund, but they have not seen fit to kind of have that concept,” he said.
“It’s important then that you design any orders or agreements to take into consideration that you can’t just roll out of one fund and go into two other SMSFs and expect to get the CGT rollover relief in respect of both rollouts of membership entitlements as only one of those rollouts will be eligible for CGT rollover relief.”
