Transfer balance cap and CGT relief: What needs to happen before midnight 30 June
By Mark Ellem
The clock is ticking on two key super reform measures – the $1.6m transfer balance cap and CGT relief rules – with an obligation to comply by 30 June 2017.
But what does this mean in practice?
Will it leave trustees and their accountants/advisers battling late into the night of 30 June to comply, before the clock strikes midnight? I don’t think so. After all, 30 June is a Friday and many will have better things to do…
So, let’s take a look at how these two super reforms will work in practice.
Transfer balance cap
Those with pension holdings exceeding $1.6m (excluding transition to retirement pensions (TTR pensions) will need bring the value of their holdings under this threshold by 1 July 2017. Post 1 July, holdings in excess of $1.6m will, in most cases, incur additional tax.
Can the excess be calculated on 30 June 2017?
The excess over $1.6m can be calculated accurately only after 30 June 2017 – as a member’s 30 June account balance is determined by asset values as at 30 June 2017, including any tax liability or refund due for the 2016/17 tax year. Whilst it cannot be precisely calculated on the day of 30 June 2017, the required amount can be the value determined as at 30 June 2017. The actual excess can then be transferred from the member’s pension account(s) to their accumulation account, also with effect as at 30 June 2017.
Isn’t this backdating the transaction? Is it allowed?
No, it’s not backdating and yes, it is allowed. Provided the member makes a written statement, by 30 June 2017, of their intention to comply with the cap as at 30 June 2017, the reduction in their pension holdings can be effected at a later date. If the member has multiple pension accounts, the written statement would need to include details of which pension is to be commuted (in full or in part) in order to meet the cap.
The ATO has issued Practical Compliance Guideline (PCG) 2017/5 that provides guidance for members affected by the cap. It acknowledges the practical problem of knowing the precise 30 June pension balance(s) prior to that date. Whilst there is a process that must be followed, as outlined in the ATO’s guidance, the amount of the commutation to comply with the cap can be worked out after 30 June 2017, based on historical data. The relevant transactions must be recorded in the fund’s 2016/17 financial statements, however, any adjustment must be done no later than the due date of the fund’s SMSF annual return.
Relief for excess amounts under $100k
The new rules provide a safety net for those who may still exceed their cap at 1 July 2017, without penalty. An excess amount is disregarded if it is less than $100,000, is caused by pensions in existence on 30 June 2017 and the excess is rectified by no later than 31 December 2017.
Capital gains tax (CGT) relief
The new CGT relief rule, which applies in particular circumstances, enables the cost base of fund assets to be reset to market value.
The intent of the new rule is to provide CGT relief on gains made before 1 July 2017, so as not to disadvantage fund members who are required to commute a pension due to the new transfer balance cap (or the TTR tax changes).
The decision to reset the cost base is irrevocable and applies only for the 2016/17 income year.
What are the deadlines and process I need to be aware of?
The law requires the trustee(s) to choose to have CGT relief apply to an eligible asset, and that choice must be made no later than the due date for lodgement of the fund’s 2016/17 tax return. For most SMSFs, the lodgement date of the 2016/17 SMSF annual return will be 15 May 2018. The notification of the trustees’ choice to apply CGT relief and, if applicable, a further choice to defer any notional assessable capital gain, will be made in the 2016/17 CGT schedule, which will accompany the SMSF annual return.
It is vitally important to note that the deadline for making the choice is the due date for lodgement of the fund’s 2016/17 annual return, and not the actual date of lodgement. SMSFs need to be aware of the fund’s due date for lodgement of their 2016/17 annual return as it may not necessarily be 15 May 2018. For example, if the fund has a number of prior year returns outstanding, it may have a due lodgement date of 31 October 2017. A request for an extension of the due lodgement date can be made to the ATO.
So, whilst the date of application of CGT relief may be 30 June 2017, or even earlier for those funds using the segregated method to claim exempt current pension income, the determination of which assets the CGT relief is applied does not have to be notified to the ATO until the fund’s 2016/17 return is due for lodgement.
Can you explain the CGT relief rules further?
For further explanation of the CGT relief rules, refer to my CGT relief explained article.
Does CGT relief apply to a fund paying a TTR pension?
A fund paying a TTR pension may also be eligible to apply CGT relief, due to the application of the integrity measures from 1 July 2017. Read my CGT relief and TTR pensions article for further information. Please note that subsequent to this article, the government has announced changes so that TTR pensions that have segregated pension assets will not be required to be partially commuted to be eligible for CGT relief.
Should I reset the CGT cost base for my super?
As with many questions, the short answer is ‘it depends’. For further discussion on this, please read Graeme Colley’s article Should I reset the CGT cost base for my super?
The most important thing to do ahead of 30 June 2017 is to ensure any notifications for the $1.6 million transfer balance cap have been completed by members and accepted by the trustees. Once the clock strikes midnight on 30 June 2017, the work begins to adjust pension balances and decide which investments will have their CGT cost base reset before the fund is required to lodge its tax and compliance returns.