{"id":7058,"date":"2016-12-21T12:48:43","date_gmt":"2016-12-21T01:48:43","guid":{"rendered":"http:\/\/www.dbalawyers.com.au\/?p=7058"},"modified":"2018-05-15T18:33:45","modified_gmt":"2018-05-15T08:33:45","slug":"transitional-cgt-relief-pension-tris-assets-fy2017","status":"publish","type":"post","link":"https:\/\/www.dbalawyers.com.au\/federal-budget\/transitional-cgt-relief-pension-tris-assets-fy2017\/","title":{"rendered":"Transitional CGT relief for pension and TRIS assets for FY2017"},"content":{"rendered":"

By Daniel Butler<\/a>, Director, DBA Lawyers<\/p>\n

\"TransitionalThis article provides a broad overview of the capital gains tax (\u2018CGT\u2019) relief for superannuation funds and explains how the cost base reset relief works in respect of assets used to support a pension or a transition to retirement income stream (\u2018TRIS\u2019) prior to 1 July 2017.<\/p>\n

Introduction<\/h3>\n

SMSF trustees and members with one or more pensions may need to take timely action on or before 1 July 2017 to reset the cost base of assets supporting pensions or TRISs.<\/p>\n

As part of the transfer balance cap and TRIS reforms commencing on 1 July 2017, the transitional CGT relief (ie, cost base reset rules) allows SMSFs to elect to reset an asset\u2019s cost base to market value. This will minimise any potential future CGT exposure in respect of that asset. Moreover, it may give rise to a capital loss that might otherwise not exist.<\/p>\n

We briefly analyse the different cost base reset rules that apply depending on the method the fund utilises to claim a pension exemption for the financial year (\u2018FY\u2019) ending 30 June 2017, namely the unsegregated method (also known as the proportionate<\/em> method) or the segregated method.<\/p>\n

Can an SMSF utilise the segregated method for CGT relief?<\/h3>\n

The segregated method is not available unless the fund was segregated as at 9 November 2016.<\/p>\n

Given the vast majority of SMSFs typically apply the unsegregated method, most SMSFs will only have access to the cost base reset rules in respect of the unsegregated method.<\/p>\n

The relevance of 9 November 2016 is the date the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (Cth) was introduced into Parliament. This Bill received royal assent on 29 November 2016 and is now known as the Treasury Laws Amendment (Fair and Sustainable Superannuation) Act 2016<\/em> (Cth) (\u2018FSSA\u2019).<\/p>\n

How does the transitional CGT relief work?<\/h3>\n

The cost base reset rules are transitional and provide CGT relief only in relation to FY2017 and subject to an election to defer a notional capital gain under the unsegregated method. These provisions are in the new sub-div 294B of the Income Tax (Transitional Provisions) Act 1997<\/em> (\u2018ITTPA\u2019), which was inserted by the FSSA.<\/p>\n

The CGT relief applies on an asset by asset basis and only applies to assets held in the fund prior to 1 July 2017. Advisers need to ensure they review and notify each client in pension or TRIS mode or who should be in pension or TRIS mode before 1 July 2017. In many cases, this will involve a review on a client by client and asset by asset basis to determine whether an election should be made for a particular member and in respect of each particular asset. Moreover, advisers will need to ensure that each particular asset, such as an SMSF\u2019s investment in WYZ Limited shares that have been purchased over the course of a number of years, is considered in respect of each tranche of shares acquired before making a cost base reset election as different costs may apply to different purchases (ie, \u2018dollar cost averaging\u2019 does not apply for CGT purposes). Each election is irrevocable and there is no other CGT relief relating to these super reform measures.<\/p>\n

The new CGT cost base reset rules are inherently complex and require a sound knowledge of the existing CGT provisions in the Income Tax Assessment Act 1997<\/em> (Cth) (\u2018ITAA 1997\u2019). For example, a segregated fund cannot utilise a tax loss (since losses are disregarded), but an unsegregated fund can (as the method statement in s\u00a0102-5 of the ITAA 1997 applies).<\/p>\n

Moreover, advisers must ensure that they do not become implicated with any \u2018backdating\u2019. There are serious penalties for fabricating documents and events that did not occur in the past. However, where oral resolutions were made and authorised by the governing rules of the SMSF, then these may be ratified in a written form with a current date on the day the resolution or event did occur.<\/p>\n

Unsegregated method<\/h3>\n

How the unsegregated pension method works<\/em><\/h4>\n

Before discussing how the unsegregated CGT cost base reset rules work, we will first provide a brief overview of the unsegregated method.<\/p>\n

Broadly, the unsegregated method relies on a formula to determine the exempt portion of a fund\u2019s taxable income as follows:<\/p>\n

Average value of current pension liabilities<\/u><\/em>
\nAverage value of superannuation liabilities<\/em><\/p>\n

In applying the unsegregated method, an actuary typically calculates the exempt portion of average value of current pension liabilities in the fund compared to the average value of the fund\u2019s superannuation liabilities. This is determined in accordance with the formula in s\u00a0295-390 of the ITAA 1997. Broadly, an actuary has regard to the average balance and the days during the financial year that the average balances are held in the fund.<\/p>\n

Example \u2014 unsegregated mode<\/h4>\n

For example, if the SMSF has $400,000 of assets funding dad\u2019s pension and mum has $400,000 in accumulation for FY2017, then a 50% pension exemption would apply for that financial year (as calculated and certified by an actuary).<\/p>\n

However, if mum commenced a pension on 1 January 2017, then since the fund was only 50% in pension mode for 6 months of FY2017, then only a 75% pension exemption would apply (again, as calculated and certified by an actuary).<\/p>\n

The main criteria for applying the unsegregated CGT cost base reset election<\/em><\/h4>\n

The criteria for the unsegregated method in ss\u00a0294-115 to 294-120 of the ITTPA are broadly summarised as follows:<\/p>\n