The ATO’s update to Law Companion Guideline (LCG) 2016/8 has provided the industry with several examples around capital gains tax (CGT) relief in relation to transition-to-retirement income streams (TRIS).
LCG 2016/8 “Superannuation reform: transfer balance cap and transition-to-retirement reforms: transitional CGT relief for superannuation funds”, released last Thursday, expanded upon the objective of the clause, which previously caused some issues for TRISs not being eligible for CGT relief.
“Looking at the before-and-after documents side-by-side, the ATO has deleted a couple of unnecessary paragraphs but then has expanded upon a few ideas, predominantly around transition-to-retirement,” Miller Super Solutions founder Tim Miller told selfmanagedsuper.
“So they haven’t necessarily changed the wording to any great deal, but what’s been highlighted, via a couple of examples, is for example when you’re moving from a segregated pool to a proportionate approach, how there’s effectively some relief there in the capacity to choose all or any of the assets, but not necessarily be restricted to the assets aligning to the transfer balance cap.
“The main area they’ve identified in the final document is that the transition-to-retirement pension doesn’t need to cease, so the concept the original document alluded to was that a pension must be commuted, so effectively rolled back or taken as a lump sum in order to access the relief.
“The update has clarified that there is no need to do that.”
However, in a segregated environment, while the law inferred that, it did not necessarily support it, Miller warned.
“The LCG does actually state that the government is looking at the wording of the legislation to make sure that is possible,” he said.
“So if you’ve got a transition-to-retirement pension and you’re using the proportionate method – a mixture of pension and accumulation assets – then adopting the 30 June date and applying the relief at that date, the TRIS can continue on.
“But if you’re in a segregated environment, and you’ve effectively got that choice to make the move from segregated assets to accumulation assets, the ATO is basically saying that the transition-to-retirement pension won’t have to stop, but it will still need to fit the legislation.
“Essentially the update is saying that for a TRIS the relief will be whether you’re using segregated or unsegregated, and you don’t need to stop it.”
While he said he believed the ATO could have gone further, he welcomed the latest update.
“I think there are a number of inserts in the LCG that at least provide some clarity to these issues, even if it’s only limited clarity, and also including a statement that says there’s no assumption the pension will have to stop effectively gives the green light and the capacity to those who were going to maintain their transition-to-retirement pension,” he noted.
“Even if we assumed that was going to be the case, it was nice to see it.
“Although I’m not sure that this makes any real difference to advisers’ lives from a more standard practice approach as the vast majority of people with TRISs don’t have segregated assets anyhow, because the whole concept of transition-to-retirement is that they have some sort of accumulation benefits coming in.
“So the mere act of segregating is more additional administration that most people wouldn’t have undertaken.
“I suspect from a TRIS point of view, most people would be proportionate.”
He said he believed the CGT issue was still going to create concerns for many people as they ultimately did not necessarily understand the concept of segregation.
“The ATO included a paragraph within the LCG that said if you’re 100 per cent in pension, whether you think you’re segregated or not, you are segregated, so hopefully that clarifies it, but I suspect there will still be confusion about member investment choices and asset segregation,” he said.
“Segregation is exclusively a taxation matter and so it’s not an area, from an advice point of view, that gets discussed at any great length with trustees.
“So they just don’t get the concept because they think segregation is an identification process, whereas it’s a tax calculation process.”
LCG 2016/8 can be found here.