By Mark Ellem
Much has been written about capital gains tax (CGT) relief – and it’s a measure worth understanding.
Whilst the focus has been on relief for retirement-phase-pension-funds, relief also applies for funds paying transition to retirement (TTR) pensions.
Even though there’ll be no requirement to commute from a TTR pension to comply with the transfer balance cap (TTR pensions don’t count towards the cap), the introduction of the new TTR pension integrity measures will result in:
In essence, the process is the same as a fund with members who are required to comply with the transfer balance cap, except there’ll be no pension commutation. As there is no reference to the $1.6m transfer balance cap, when reviewing which SMSF clients will be eligible for CGT relief, don’t restrict your review to SMSFs who have members with pension accounts in excess of $1.6m.
For example, let’s consider an SMSF with two members and total assets of $700,000. At first glance, this SMSF would not be eligible for CGT relief, however, one member has a TTR pension with a balance of $500,000. Assuming the SMSF is using the unsegregated method to claim ECPI in 2016/17, you would expect an ECPI% of around 70%. From 1 July 2017, the new TTR pension integrity measures will mean that the level of ECPI claimed will be nil. This will have an effect of the amount of tax the fund pays when an asset is sold as any gain accrued since acquisition date to 30 June 2017 will be fully assessable (subject to CG discount rules) when sold after 1 July 2017.
Consequently, this SMSF is eligible to apply the CGT relief rules. As the SMSF is using the unsegregated method to claim ECPI in 2016/17, all of the assets are eligible for CGT relief.
Let’s assume the SMSF has the following assets (all held for at least 12 months):
| Asset | 30 June 2017 market value | Cost base |
| Direct property | $600,000 | $400,000 |
| Listed shares (one company) | $55,000 | $42,000 |
| Bank account | $45,000 | N/A |
The SMSF then has the choice to either include the assessable gain for each of the assets, or defer until the asset is sold. The election to defer is made on an asset-by-asset basis and is also an irrevocable election to be made on the approved ATO form.
| Asset | Cost | MV | Gain | CG Discount | Net gain | ECPI (70%) | Assessable gain |
| Property | $400,000 | $600,000 | $200,000 | $66,667 | $133,333 | $93,333 | $40,000 |
| Shares | $42,000 | $55,000 | $13,000 | $4,333 | $8,667 | $6,067 | $2,600 |
When the asset is sold after 30 June 2017, the assessable capital gain will be calculated based on a cost base of the respective 30 June market value and using a purchase date, for CG discount purposes, on 30 June 2017. The deferred assessable gain will also need to be included in the income year the asset is sold. For example, let’s say the listed shares were sold in 2019/20 for $60,000 and the notional gain in 2016/17 was deferred, the total assessable amount from this disposal will be calculated as follows:
| Consideration | $60,000 |
| Cost base | $55,000 |
| Gross gain | $5,000 |
| Apply CG discount | $1,667 |
| Assessable gain | $3,333 |
| Add deferred gain from 2016/17 | $2,600 |
| Total assessable | $5,933 |
In this example, by applying the CGT relief and deferring the notional assessable gain in 2016/17, the SMSF saved $910 in fund income tax for this asset.
For SMSFs wholly consisting of TTR pensions, there is a trap that can prevent the fund from applying the CGT relief rules.
Such funds are by default segregated funds. For the CGT relief rules to apply the fund must either transfer assets from the segregated current pension asset pool to the segregated non-current asset pool or change to the unsegregated method, on or before 30 June 2017. In practical terms, this would require the SMSF to have at least one member accumulation account on or before 30 June 2017. This could be achieved by either a member or their employer, making a contribution or a member effecting a partial or full commutation of a pension, with the commuted amount being retain in their accumulation account.
However, be mindful of the ATO’s comments in relation to application of Part IVA to schemes or arrangements designed to trigger access to the CGT relief rules. For example, a member making a $1 contribution would warrant ATO scrutiny as opposed to a fund that received an SG contribution from a member’s employer or where the member partially or fully commuted a pension.
