Superannuation Changes: Transitional CGT Relief for SMSF

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:

  1. TRIS

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.

  1. ABP

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.

  1. 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.

Next Steps

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.

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Superannuation Tax Deductions Pre and Post 30 June 2017

The golden days of being able to claim large tax deductions for making contributions to a complying superannuation fund are over.  Not so many years ago, people could make a tax deductible $100,000 contribution, then the amount reduced to $50,000, then to $35,000 (applicable to 30 June 2017 for people 49 years and over), $30,000 for those under 49 years until 30 June 2017 and then $25,000 for everyone after 1 July 2017.

Yes, the tax deductible limit has reduced to 25% of the limit applying only a handful of years ago.  The high deductible limit was to encourage people to contribute to super and not be eligible for the age pension at retirement age; this was a long-term strategy not to have older Australians being a financial burden on the Government in their retirement.  That concept has been scrapped with concerns of what the superannuation contributions tax deduction is costing in the short term; after all, the Government can be in office for three years – budgeting for the future/long term age pension demands on future Governments is too far away.

My apologies for the cynicism but for many income earners, the $25,000 tax deductible limit after 1 July 2017 will be inadequate to fund a lifestyle in retirement for which they had hoped.  As mentioned in another article recently published in Canberra Tax Advisor, the non-concessional (non-tax deductible) annual limit reduces from $180,000 to $100,000 after 1 July 2017.  This further reduces some people’s capacity to build superannuation savings.

While such annual contributions are understandably beyond the average salary and wage earner, people in receipt of inheritances or gifts should not be restrained by these limits to contribute to their retirement savings.  If people cannot place such one-off amounts into a superannuation fund, the likelihood is that the amounts will be squandered, although reducing the home mortgage balance is a worthwhile option.

So people have until 30 June 2017 to make superannuation contributions of $30,000 or $35,000 – depending on their age as explained above – before 30 June 2017 after which time, the maximum deductible limit reduces to $25,000.

The same principles apply to people who are on salary sacrificing arrangements.  Consideration might be given to increasing additional superannuation contributions, above standard superannuation guarantee payments, to the higher maximum limits available this financial year; they have three months of this financial year to arrange this with their employers.  They should also ensure that they instruct their employers to reduce their salary sacrifice contributions after 1 July 2017 to avoid an excess contributions situation in future income years.

This article should be read in conjunction with my recent article in Canberra Tax Advisor on non-concessional superannuation deductions.

Michael Bannon

Tax and Superannuation Partner

10 March 2017

Tax and Superannuation Strategies Before and After 1 July 2017

The changes to superannuation from 1 July 2017 will cause many people to re-think what they should be doing with their superannuation savings and pensions before that date.  At the time of writing, we have four months to implement valuable strategies.

One of the prominent changes to super after 1 July 2017 is the change to whether non-concessional (non-tax deductible) contributions can be made to a complying superannuation fund such as a retail or industry fund or to a self-managed superannuation fund (SMSF).

The making of non-concessional contributions serves at least two purposes.  The most obvious is to more quickly build superannuation savings.  Concessional (tax deductible) contributions are capped this year ending 30 June 2017 to $30,000 for people less than 49 years of age  or $35,000 if 49 years and over.

Non-concessional contributions of $180,000 may be made by 30 June 2017.  Alternatively, a maximum of $540,000 ($180,000 x 3) may be made by 30 June 2017 but no further non-concessional contributions may be made for the next two financial years (years ending 30 June 2018 and 2019). After 1 July 2017, the annual and three year limits reduce to $100,000 and $300,000 respectively.

For some people who have cash outside a super fund, consideration might be given to making a lump sum contribution subject to the above limits before 1 July 2017.  While having a lazy $540,000 might seem unusual, there may be situations where a person may have just sold a property or have inherited a share of an estate.

Remember that having savings in a super fund still represents a very tax effective environment with tax on income being only 15% whilst in accumulation phase (usually the time before pensions begin to be drawn).  In accumulation phase, the tax rate on capital gains is an effective 10%.

The second purpose of making non-concessional contributions is to build on the tax-free component of a person’s member’s account on their super fund.  Upon the member’s death, the tax-free component paid to a non-dependant, such as an adult child is not subject to tax.  In contrast, the taxable component of a death benefit paid to an adult child is subject to tax at 15% plus 2% Medicare levy.  Death benefits paid by a super fund to a spouse or child under 18 years are tax free.

The super changes are not without their traps.  People over 65 years can only make the annual non-concessional contribution cap of $180,000 before 1 July 2017 and must also satisfy the work test.  That test requires the person to be gainfully employed for at least 40 hours in a continuous 30 day period during the financial year.

As a means of restricting people to contribute to their super savings after 1 July 2017, the Government has spuriously stopped people with more than $1.6 million in super savings from making non-concessional contributions.  Therefore, this financial year is the last chance for those people to make non-concessional contributions.

This article has been restricted to making superannuation contributions before and after 1 July 2017.  A planned future article will deal with the $1.6 million account balance test, rolling amounts from pension phase to accumulation phase and changes to tax arrangements if a transition to retirement pension continues after 1 July 2017.


Michael Bannon

Tax and Superannuation Partner

28 February 2017

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