SMSF trustees that were paying Transitional to Retirement Income Streams (TRIS) or an account based pension (ABP) with a balance of more than $1.6m should review the SMSF’s CGT position in light of the transitional CGT relief rules.
Summary of the New Superannuation Laws
Below is a summary of the new superannuation laws from 1 July 2017:
Until 30 June 2017, no income tax or CGT is payable by an SMSF on income derived by the investment of a member’s account balance where that income is used to fund a TRIS. From 1 July 2017, such income used to pay a TRIS will be taxed at 15%. Capital gains will be taxed at 15% where the asset has been held for less than 12 months. For assets held for at least 12 months, the one-third CGT discount will apply, reducing the effective CGT rate to 10%.
Some people who have no financial need for the TRIS may choose to discontinue their TRIS because the income on their account balance will be taxed whether or not a TRIS is taken. By doing so, their superannuation assets are preserved to be used in retirement.
Where a member’s ABP account balance exceeds $1.6m, the excess will need to be commuted to accumulation phase by 30 June 2017 or be paid out of the superannuation fund. Income on assets held in accumulation phase is taxed at 15%, as are capital gains where the asset has been held for less than 12 months. Accumulation accounts with assets held for at least 12 months attract the one-third CGT discount, which reduces the effective CGT rate to 10%. ABPs continue to pay no tax on the income and capital gains arising from the assets that are used to fund the ABP.
- CGT Elections
The CGT elections enable SMSF trustees who had part of the super fund in a TRIS or ABP at 9 November 2016 to elect for certain assets to be treated as if they were sold and reacquired for CGT purposes on 30 June 2017. The rules differ for SMSFs whose assets were segregated at 9 November 2016, compared with those funds that were using the proportionate method. The CGT election can be made on an asset by asset basis. The election crystallises the capital gain on the SMSF assets, thus resetting the cost base at 30 June 2017. Also if the fund is partially in accumulation phase an additional election can be made to defer the payment of tax on unrealised capital gains that would be subject to tax as a result of the election to treat all assets as disposed of in the fund.
If this transitional CGT relief rule did not exist, SMSFs would have needed to sell all of their assets before 30 June 2017 in order to benefit from the 0% tax rate applying to SMSFs paying TRISs or ABPs. This could have resulted in flooding or distorting certain markets. The CGT election enables SMSF trustees to benefit from the 0% CGT rate until 30 June 2017 without the need to dispose of assets. However, the election will not be beneficial in all situations and therefore care should be taken when making the election.
Time Limit for the Election
The CGT Election must be made on or before the date that the SMSF’s tax return for the year ending 30 June 2017 is due for lodgement.
Should SMSF Trustees Make the CGT Election?
Whether an SMSF should make the CGT election depends on many factors including:
- Whether the SMSF was using the segregated or proportionate method at 9 November 2016.
- Whether there is an unrealised capital gain or capital loss on each asset.
- The value of the assets.
- Whether the assets will be sold within the next 12 months, because making the election also resets the acquisition date for CGT purposes.
- Whether the SMSF has capital losses brought forward.
The circumstances of each SMSF will be different and therefore SMSF Trustees should seek advice on whether they should make the CGT election for each of the SMSF’s assets. The SMSF’s assets should be reviewed on an asset by asset basis and also collectively; this could be a time consuming task.
If your SMSF was paying a TRIS or ABP and your account balance is over $1.6m at 9 November 2016, you will need professional tax advice on your SMSF’s CGT position before the due date for your 2017 SMSF tax return, on the appropriate course to take. Contact us for further information on the superannuation law changes and whether you should make the CGT election.
Naomi Smith is an Authorised Representative (No. 001 250 392) and Duescount Pty Ltd trading as Nexia Duesburys is a Corporate Authorised Representative (No. 001 243 884) of SMSF Advisers Network Pty Ltd AFSL 430062.