Proportionate method best for CGT relief

Adopting the proportionate method before 30 June in order to qualify for capital gains tax (CGT) relief would deliver the best outcome for SMSF trustees, according to an industry lawyer.

“There are really three options, with the first being that you do nothing,” Townsends Lawyers superannuation special counsel Michael Hallinan told the Super Central Bacon, Super and Eggs seminar in Sydney last week.

“The second option is you’re affected by the transfer balance cap and so you transfer excess assets from the pension pool to the accumulation pool.”

Hallinan said the third option was to adopt the proportionate method on or before 30 June.

“The default option should be option three and while there could be some funds out there where the other options are appropriate, I think in most cases option three is the best action and certainly guarantees the best outcome in most circumstances,” he noted.

“So as a starting position, you’d move from a segregated fund into a proportionate fund and then work out if there are any reasons why you shouldn’t select option three.

“What you’ve done by moving to a proportionate method is that the capital gains accrued to 1 July will be protected, they’ll be exempt, and you have to reset the cost base of all pension assets to market value as at 30 June.”
He stressed the risk with using option one was the issue of section 387 of the Income Tax Assessment Act.

“How can you be certain in the future that fund will be able to utilise the segregated method when you want to utilise it in the financial year?” he warned.

“That’s the biggest question and that’s perhaps the biggest risk.”

When it came to option two, two pools were being created from a previously segregated fund, however, the problem with that method was that in the 2018 financial year the fund would be unable to use the segregated method of calculating exempt income, he said.

“If you’re forced to realise one of the assets within the $1.6 million pool, all you’re doing is now using the proportionate method and the capital gain will be calculated on the un-reset cost base,” he said.

“So option two is only worthwhile if you’re certain that the funds in the future will not be subject to the proportionate method, but again, how can you be so certain that the fund going forward will not be subject to that risk?

“Curiously, in the explanatory memorandum the ATO talk about this risk of putting too many assets out of the segregated pool into the accumulation pool and it being a Part IVA [tax anti-avoidance] risk, and I can understand why they say that, but it’s not likely to happen given the fund not being subject to section 387 going forward.”

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