When major changes are made to income tax legislation in general, and superannuation laws in particular, there is a period of uncertainty that everyone experiences. This uncertainty affects not only the taxpayers, but also the professionals they turn to for advice and the Australian Taxation Office, which administers and interprets the changes.
I must admit to being confused as to how the different CGT relief options worked in practice. Upon researching the matter further, it became obvious that applying for the CGT relief must be done asset by asset. Whether the segregation method or the proportionate method is used will depend on when assets are transferred and the assets owned.
If the excess over the pension transfer balance cap is commuted back to accumulation before June 30, 2017, the segregation method must be used. Therefore, if a self-managed super fund has large, lumpy assets, such as land and buildings, it may not be possible to sell them before that date, leaving no option but to choose the proportionate method.
Part of the decision whether to claim CGT relief will depend on when assets are expected to be sold in the future, and whether the number of fund members in pension phase will change in the near future. There is a case for not claiming CGT relief when the trustees do not expect to sell assets with unrealised capital gains until after all of the members are in pension phase.
For example, a fund that has a member with an account-based pension worth $2 million, and another member in accumulation phase and an account balance of $1 million, may be better off not claiming the CGT relief until after both members are in pension phase. Under the proportionate method, if the asset is sold, then a higher percentage of the capital gain could be tax-free.
My understanding of how the CGT relief works under the proportionate method increased after re-reading the ATO law companion guideline. The relief is always related to a singular asset in the guideline, and it states many times that a fund has the choice of applying or not applying for CGT relief.
The main benefit of the segregation method will be that for assets chosen, all of the capital gain made could be regarded as exempt. Under the proportionate method, assets chosen to receive the CGT relief will have a percentage of the gain made assessable.
Funds will have a choice of either paying tax on the assessable proportion of a capital gain made on an asset subject to the CGT relief in the 2017 year or deferring the capital gain until the income year when the asset is sold.
The process of calculating the amount of the deferred capital gain is done under a modified version of the standard CGT method. Under step one, the fund assumes that there are no current year capital losses to decrease the gain or any prior year capital losses that would have been deducted under step two.
The capital gain then has the one-third CGT discount applied at step three, as long as the asset was purchased before July 1, 2016. As an SMSF would not be eligible for the small business concessions, there is no step four but there is a new step five.
Under this final step, the percentage that the average value of the current pension liabilities is of the value of all superannuation liabilities of the fund – in other words the tax-free percentage calculated by an actuary – is applied as an extra discount to the capital gain. The resulting decreased capital gain will become the deferred capital gain for the asset for the 2017 year.
