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Trap in new CGT relief

Trap in new CGT relief

A trap exists in the difference between a new Act and the previous exposure draft version of the Act’s Bill that had been circulated.

The trap relates to certain CGT relief. On its face, many people will choose to use the CGT relief. However, for some it could be a step backwards.

Accordingly, it is vital that practitioners are aware of this trap.

Background

In September 2016, Treasury released an exposure draft version of what later became the Treasury Laws
Amendment (Fair and Sustainable Superannuation) Bill 2016 (Cth) and then became the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (Cth).

The exposure draft version of the Bill contained two forms of CGT relief for those with pensions. One form applies to those with segregated assets supporting the pension. The other form of CGT relief applies for those using the unsegregated method (also known as the proportionate method or actuarial method). Naturally, the unsegregated method is very common in practice. Accordingly, this article focuses on the trap in respect of the CGT relief for the unsegregated method, however, the trap could conceivably also impact upon those who choose to use the form of the CGT relief for segregated assets.

In the exposure draft version, if a fund was eligible for and chose to apply the CGT relief for the unsegregated method, the relief would be as follows:

In determining the cost base and reduced cost base of the asset on and after 1 July 2017 for the purposes of Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997, the fund is taken:

  1. to have sold, immediately before 1 July 2017, the asset for a consideration equal to its market value; and
  2. to have purchased the asset again just after that sale for a consideration equal to its market value.

However, there were a number of important changes between the exposure draft version and the actual Bill introduced in Parliament on 9 November 2016, which in turn became the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016 (Cth). The relief that the actual Act currently offers is as follows (see the s 294-115(3) of the Income Tax Assessment Act 1997 (Cth)):

For the purposes of Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997, the fund is taken:

  1. to have sold, immediately before 1 July 2017, the asset for a consideration equal to its market value; and
  2. to have purchased the asset again just after that sale for a consideration equal to its market value.

Accordingly, the difference is the omission of the phrase ‘In determining the cost base and reduced cost base of the asset on and after 1 July 2017…’ On its face this is only a minor change. However, for some, this could prove important.

Implication of the change

The implication of the change can be significant. Namely, the omission of those 18 words causes the 12 month period to reset before the asset fund is eligible again for the one-third CGT discount.

The explanatory memorandum to the Bill makes this abundantly clear, stating that:

As the superannuation fund is taken to have sold and then reacquired the asset, applying CGT relief would reset the 12-month eligibility period for the CGT discount.

Case study

Consider Rueben. He has $2 million in an SMSF, the bulk of which (say 70%) was paying him a transition to retirement income stream on 9 November 2016. Odds are, his fund will be eligible to choose whether or not it applies the CGT relief for unsegregated pension assets.

Now, assume that:

  • Rueben’s SMSF has some shares that it bought in 2014 for $200,000.
  • The shares will be worth $300,000 on 30 June 2017.
  • The shares will be sold for $480,000 in May 2018.

If Rueben chooses to apply the CGT relief in s 294 115, this means that his SMSF would probably have additional assessable income in the 2018 financial year of approximately:

  • $20,000 (calculated as [$300,000 – $200,000] x [2/3] x 30%, which relates to the ‘deferred notional gain’ — see s 294-120) plus
  • $180,000 (calculated as [$480,000 – $300,000]).

That is, if Rueben’s SMSF chooses to use the CGT relief, its assessable income in the 2018 financial year would increase by $200,000.

However, if Rueben’s SMSF does not choose to use the CGT relief, its assessable income in the 2018 financial year would only increase by $186,666 (calculated as [$480,000 – $200,000] x [2/3]).

This difference comes from the fact that choosing to use the CGT relief ‘resets the clock’ for the 12 month period for the one-third CGT discount.

Practical implications

The omission of those 18 words causes the 12 month period to reset before the asset fund is eligible again for the one-third CGT discount.

Accordingly, if there is any chance that a pension asset might be sold between 1 July 2017 and 30 June 2018, funds and their advisers should calculate the specific numbers very carefully before choosing to apply the CGT relief for that asset.

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

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