With the majority of fund managers’ 2017 tax statements issued, and with self-managed superannuation funds having finalised the balances of pension accounts as at June 30, 2017, the strategic work for professionals dealing with the $1.6 million transfer balance cap now begins.
A large component of dealing with the excess over the cap will be choosing what method to use for the capital gains tax concession for assets transferred back to an accumulation account. SMSFs that have been in pension phase for all of 2016-17 are required to use the segregation method. This is because for all of the financial year, except for the last day if a fund is using the CGT concession when rolling back the excess over the $1.6 million cap, all of the assets of the fund are automatically allocated to the pension accounts.
When an SMSF has, for some or all of 2016-17, had members that are in accumulation and pension phase, trustees can choose to use the segregation method or the proportional method for all of the year.
Under the proportional method, trustees have the choice of resetting the cost base of assets up to the value of the excess over the $1.6 million, or they can choose to reset all of the assets of the SMSF at June 30, 2017. I can find no benefit for an SMSF choosing the proportional method over the segregation method.
This is because when the proportional method is used, and investments are selected to have their cost base reset to the market value at June 30, 2017, a fund with members in accumulation phase has a percentage of the capital gain taxed, thus negating some of the benefit of the CGT concession.
Whereas if the segregation method is used, all of the unrealised capital gain, for those assets rolled back into an accumulation account, is untaxed.
A condition of claiming the CGT concession is that, in addition to rolling the excess over the $1.6 million limit back into an accumulation account, the fund must use the unsegregated proportional method at June 30, 2017, and obtain an actuarial certificate for what is, in effect, the last day of the 2016-17 year.
There is a possibility, depending on what actuary an SMSF uses, that a small portion of the income earned by the fund for 2016-17 will be classed as taxable.
Some actuaries assign a time for the commutation and roll back to accumulation of 23:59 on June 30, which results in no percentage of the income earned in the 2017 year being taxable. Other actuaries use a time for the rollback to accumulation of 00:01 on June 30, 2017. In this situation, a small percentage of the income the fund earned in 2016-17 could be classed as taxable.
The best way I have found to select which assets for which to reset the cost base on June 30, 2017, is to obtain a report of unrealised gains and losses from whatever platform or accounting system the SMSF uses, then convert this into a CSV/Excel spreadsheet.
From there, I sort the columns in the sheet so the assets with the highest unrealised gains are at the top and those with the largest capital losses are at the bottom. This makes it easier to assess which assets provide the highest capital gain.
One of the few times when it might not be worthwhile claiming the CGT concession for assets rolled back into an accumulation account is when there is a member in accumulation who will soon be commencing a pension.
