The capital gains tax (CGT) relief transitional provisions are now law and the timeline to apply these provisions is running out fast. The ATO has issued a finalised Law Companion Guide LCG 2016/8 on the application of these provisions. As they are transitional in nature, the rules will not be inserted into the Income Tax Assessment Act 1997 (ITAA), but rather will be part of amending it, that is, sections 294-100 to 294-120 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA).
The object of these provisions is to provide temporary relief for complying superannuation funds from tax consequences for capital gains accumulated prior to 1 July 2017, where these gains would have been exempt income if realised prior to the transfer/commutation to remove the excess over the transfer balance cap or the changes to the treatment of a transition-to-retirement income stream (TRIS).
Following are some of the intricacies of these transitional provisions to assist you when advising your clients on these matters.
The CGT relief arrangements will allow complying superannuation funds that choose to apply the relief to reset the cost base on assets that are reallocated or reproportioned from the retirement phase to the accumulation phase prior to 1 July 2017. If the choice is made, the fund must notify the tax commissioner in the ‘approved form’ on or before the day the trustee is required to lodge the fund’s 2016/17 income tax return. This choice is not automatic and once made it cannot be revoked.
The relief is provided by deeming the superannuation fund to have sold and reacquired the relevant asset for market value. This will ensure that, when these assets are sold after 1 July 2017, capital gains only arise in relation to capital growth that accrued to those assets after the application of the CGT relief. As there has been a triggering of a CGT event , the 12-month eligibility for the CGT discount is also reset.
The CGT relief provisions are applied differently depending on whether the segregated or proportionate method is applied to the fund when calculating the exempt current pension income (ECPI).
Segregated current pension assets
Segregation occurs when specific assets are selected to solely support the current pension liabilities of income streams for investment purposes or when the fund is entirely in pension mode. On reallocation, if an asset(s) can transfer completely from the segregated current pension to the accumulation phase, these specific assets will be eligible for CGT relief under the segregated method. The remaining pension assets continue to be treated as segregated current pension assets and do not benefit from any cost base reset. Where a member’s total superannuation balance exceeds $1.6 million, the fund must use the proportionate method from 2017/18.
However, where the asset is a large single asset, such as property, and hence must then support both the retirement and accumulation-phase interests, the SMSF may adopt the proportionate method and will need to account for the assets of the fund on a proportionate approach for the 2017 financial year. This approach can also occur if the fund chooses CGT relief for some or all of the assets that stop being segregated pension assets.
Under both methods the relief only applies to certain CGT assets held by a fund throughout the ‘pre-commencement period’. If these conditions are met, the fund is deemed to have sold and reacquired the asset at market value. The cost base is hence reset to the new market value figure. As the earnings on segregated current pension assets are entirely tax-free, there are no tax consequences on the reallocation. The capital gain or loss on the deemed sale is completely disregarded.
Assets subject to the proportionate method
Under this method the relevant asset(s) were neither a segregated current pension asset nor a segregated non-current asset during the ‘pre-commencement period’. The relief provided here is similar to the relief for segregated current pension assets. If the conditions for the relief are satisfied, the superannuation fund is deemed to have sold and reacquired the asset(s) on 30 June 2017. The cost base of the asset(s) is similarly reset at that time to its market value. Based on the proportionate method, a proportion of the notional capital gain that supports the accumulation phase of the fund would be taxable in the 2017 income year. However, a choice can be made to defer this capital gain until the asset is actually realised for CGT.