What you need to know about CGT relief under the new super rules
There’s a lot of noise about the government’s new super reforms, but one garnering a lot of questions is the capital gains tax (CGT) relief offer. What it is and when it applies is creating a lot of confusion, so, let me set the record straight.
Almost 32 years ago, the CGT regime began in Australia. Investments purchased before 20 September 1985 were granted a special exemption from this new tax. But with changes to tax rates within super pensions applying from 1 July, instead of an exemption, this time the government is offering super funds a one-off CGT relief on certain investments – if they meet specific eligibility requirements.
If your SMSF investments have performed well, you may have unrealised capital gains
Sometimes these are called paper profits, because until you sell the investment you haven’t received the actual profit. Under current rules, when you realise a capital gain inside a pension account there is no tax payable. But after 1 July 2017, that won’t be the case for all situations. So, to help super funds transition to the new regime, a special provision will allow the cost basis of eligible investments to be reset and brought up to market value.
CGT relief will reduce the likelihood of tax on profits accrued under the previous regime
The key reason CGT relief is being offered is because some money currently held in super pensions will face a higher tax rate after 1 July 2017. It’s important to realise that balances up to $1.6 million will remain entirely tax free and as such, won’t need CGT relief. However, if you have more than $1.6 million in your retirement pension CGT relief is available, but only if you move the amount above the limit back to the accumulation phase of super.
If you have a transition-to-retirement pension, then CGT relief is available to you regardless of the balance of your account, as long as you keep it open or don’t stop the pension until 30 June this year.
In all scenarios, your SMSF must meet other criteria to be eligible for CGT relief
There are two types of CGT relief: ‘proportionate’ and ‘segregated’ and they each have their own calculation method. The one that your SMSF can use will be based on the fund’s technical structure as at 9 November 2016 – and it may not be what you think.
SMSFs that run a pooled investment portfolio are the most common type of SMSF. They are considered proportional funds because the earnings from the combined portfolio are proportioned to each account within the SMSF, relative to the size of that account.
However, for tax purposes, if 100 per cent of your SMSF’s accounts are in pension phase, then your fund will be defined as segregated. And it is this tax definition that is most important in relation to the CGT relief offer. As such, this means more trustees can use the segregated method to calculate their CGT relief than otherwise would be expected.
It is possible to lose eligibility for any CGT relief
If the status of your SMSF changes from proportional to segregated after 9 November 2016, you could lose eligibility for CGT relief. However, if the reverse happens (changing from segregated to proportional) after 9 November 2016, then CGT relief must be calculated at the date the change occurred, rather than at 30 June 2017.
It’s important to talk to your accountant or advisor about any planned contributions, rollovers or new pensions so that incomplete instructions don’t jeopardise the ability of your SMSF to maintain a consistent tax structure through to 30 June.
CGT relief is optional and that’s a good thing
Before 30 June, understanding if you’re eligible is what’s important; but remember, there are a number of situations where it won’t be beneficial for you to take up CGT relief. From 1 July, you can begin to work through the considerations to ascertain if CGT relief is likely to be worthwhile for your SMSF or if it may be better to rely on the standard tax exemptions that continue to be offered to SMSFs.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.
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