Splitting CGT relief has catch

Splitting CGT relief

Capital gains tax relief is available when SMSF assets are required to be split when spousal members separate.

A specialist SMSF lawyer has reminded practitioners that the capital gains tax (CGT) relief associated with asset splitting with regard to the separation of spousal members has to be applied with consistency, meaning both parties will not necessarily benefit from these rules.

The CGT relief provisions relating to asset splitting within an SMSF are contained under section 126-140 of the Income Tax Assessment Act 1997.

“The consequences are broadly this. In the first instance, for the fund that owns the CGT asset, we have a disregarding effect. So the capital gain or loss is disregarded,” DBA Lawyers senior associate William Fettes said during his firm’s latest SMSF online update.

“So that is something that is of material significance potentially to the member remaining [in the SMSF] that there is no CGT liability associated with the CGT event where a member is departing.”

However, Fettes pointed out the asset valuation experience of the departing member is in line with the CGT relief available to the remaining member.

“The sting in the tail, or the qualification to the good source of the disregarding effect, is that the fund that receives the asset from the existing fund is going to inherit the cost base from the transferee fund,” he said.

“So it’s a deferral mechanism. It’s not a have your cake and eat it mechanism. So someone loses out here potentially.”

According to Fettes, this means the fund receiving the asset from the existing fund may experience some CGT exposure in the future.

He reminded advisers, though, it was not necessary to take advantage of the CGT relief provisions upon splitting.

“It really depends on who you’re acting for whether that relief is the most appropriate thing to get,” he said.

“If you really need to be mindful of whether you want the rollover relief applied or not, [it will be] in the science of how the [splitting] order is drafted in terms of whether the asset is specifically covered or not and then think of who you’re acting for.”

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