Capital gains tax relief is available for certain assets held in a self-managed super fund as part of the transition to the $1.6 million transfer balance cap on July 1, 2017.
The relief applies to assets acquired before November 9, 2016, as long as the assets are not held in a fund that is solely in accumulation phase.
SMSF trustees must elect to receive the relief for each asset. The concession is to ensure only capital growth on assets in pension phase is taxed after July 1 this year.
It’s important to determine whether assets should be segregated or unsegregated when developing the right strategy around this provision.
Andrew Zbik, a senior financial planner at Omniwealth, explains fund members in pension phase with a balance below $1.6 million can choose to segregate certain assets.
The member may have all their assets in pension phase at the moment and can choose whether they want to move some of them back into accumulation phase.
The date the assets are transferred from pension phase to accumulation phase will determine the new cost base. So in the future, should the asset be sold, the cost base will be set from that date.
“This disregards any previously unrealised capital gain, but no CGT discount is available on the recalculated cost base,” Zbik explains.
Funds whose assets are valued above $1.6 million don’t have the ability to segregate their assets; rather, asset values are set on a pro rata basis across the portfolio.
“There has been a lot of debate about selecting which assets should be left in pension phase and which ones should be moved into accumulation phase,” Zbik explains. “From a practical perspective, for members whose assets are under $1.6 million in the pension phase, there are few circumstances where members should segregate assets and put some back into accumulation phase simply because tax will be payable.”
Given the complexity, Zbik says it’s essential to have accurate valuations for any assets that support a pension.
“Of particular note, people with property will need to make sure they have an accurate market valuation because there may be consequences if the ATO deems the value of the asset is too conservative.”
Another issue Zbik mentions is reversionary pensions.
“A lot of clients with binding death nominations have nominated a spouse to receive a reversionary pension,” he says. “Be aware if receiving the reversionary pension takes you over the balance transfer cap. Some members need to consider this as part of their estate planning strategy.”
Contribution splitting between spouses and commuting pensions can help SMSF members stay within the contribution and transfer balance caps.
As Zbik warns: “Be aware that if you do exceed the balance transfer cap, and you do it for a second year and haven’t rectified it, you’ll be slugged an extra 30 per cent tax.”
