If you had more than $1.6 million of superannuation in retirement phase as at 1 July 2017, or you have, or in the process of reverting a transition-to-retirement pension back to accumulation phase then you should have already started considering your future tax circumstance, and making some serious decisions.
Anyone with more than $1.6 million of super in pension phase as at 1 July 2017, is forced to withdraw the excess over that amount from the retirement phase, and move it back to accumulation phase, or withdraw it from the super system.
Before July 2017, if your super pension balance (from all pension accounts) in retirement phase exceeded $1.6 million, you had two options when reducing your super pension balance in retirement phase to below $1.6 million. You could move the excess into accumulation phase within the super system (where earnings will be taxed at 15%), or you could withdraw the excess from the superannuation system. For the general rules applicable to the $1.6 million transfer balance account, see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap.
If you moved, or planning to move, the excess funds (above $1.6 million) into the accumulation phase of a super fund, and you have accumulated capital gains before 1 July 2017 on that transfer, you may be eligible for capital gains tax relief for that gain.
According to the explanatory memorandum accompanying the legislation, “Where individuals need to commute superannuation income streams to transfer amounts from the retirement phase to the accumulation phase to comply with the transfer balance cap, earnings on assets supporting these commuted balances will become taxable. Similarly, where individuals have a TRIS [TRIP], earnings on assets supporting these superannuation income streams will become taxable from 1 July 2017 as they will no longer be in the retirement phase.
“The object of the provisions is to provide relief for complying superannuation funds from the tax consequences for capital gains accumulated before 1 July 2017, where these gains would have been exempt income if realised prior to a commutation being made to comply with the transfer balance cap, or the change to the treatment of TRIS [TRIP].”
Note: If you are claiming the CGT relief, you must apply for the temporary relief BEFORE you lodge your super fund’s 2016/2017 tax return. The CGT relief is available if the asset/s involved were owned by the SMSF were held continuously before or from 9 November 2016 through to 30 June 2017.
What is the capital gains tax relief available?
According to the explanatory memorandum, the CGT relief allows complying super funds that CHOOSE TO APPLY the relief to reset the cost base on assets that are reallocated or re-proportioned from the retirement phase to the accumulation phase before 1 July 2017.
The relief allows the super fund to deem the transferred asset has been sold and repurchased at current market value as at 30 June 2017. The deemed sale triggers a capital gains tax event, which means the cost base for the asset is reset at current market value. The implications of this deemed transaction is that when the asset is sold some time in the future, after 1 July 2017, only capital gains arising from 1 July 2017, will be taxable.
Note also that since the asset is deemed as a new purchase, the eligibility for the 33% CGT discount restarts, and would not be available until the super fund holds the asset for a further 12 months.
Important: Eligibility for CGT relief on transferred pension assets, only applies to assets held during pre-commencement period (of the legislation, that is, 9 November 2016) and up to 30 June 2017, at least. A super fund must actively apply for the CGT relief using an approved form, and submit it to the ATO by the lodgement due date for the super fund’s 2016/2017 income tax return. A super fund can choose not to apply for CGT relief, but if a super fund does apply, the application cannot be revoked.
What does the ATO say about the capital gains tax relief?
Quoting directly from the ATO’s guidance note 6 (Transitional CGT relief):
CGT relief is not required in situations where you dispose of the asset between 9 November 2016 and 30 June 2017. This is because the existing CGT exemption rules apply to those disposals.
If you choose to use CGT relief, it will apply differently depending on how you calculate your exempt current pension income for a year. You may be calculating your exempt current pension income by:
- selecting specific assets to support your income streams (segregated method), or
- allocating a percentage of your total assets to support your income streams (proportionate method).
If you have been using the segregated method and either continue to use it, or switch to the proportionate method, an asset must cease being a segregated current pension asset at a time between 9 November 2016 and 30 June 2017 to be eligible for relief. The capital gain or loss for that asset will then be entirely disregarded.
An asset ceases to be a segregated current pension asset when:
- it is transferred out of the pool of segregated current pension assets; or
- you make and record an election to switch to the proportionate method.
If you have been using the proportionate method and continue to use it throughout the period 9 November 2016 to 30 June 2017, CGT relief is available for all your assets.
Capital gains are partly disregarded for unsegregated assets, and may be deferred. Capital losses on unsegregated assets are recognised under existing rules. You will need to keep records of the assets with the CGT relief and any exempt portion of the deferred capital gain.
You can choose not to apply the CGT relief if it is in your members’ best interests. For example, if in the future, your members will be predominately in retirement phase, then electing to use the CGT relief may crystallise a CGT liability that would not exist in the future.
You may not be able to use the segregated method to calculate your exempt current pension income for 2017–18 onwards…
For more information about the ATO’s view of the CGT relief available, see this link.
Warning: We are an information site rather than advisory site, and the rules explained above are complex and may have significant implications for those affected. The text above, like all information on SuperGuide, is for information purposes only.
For more specific information on how the CGT relief is applied to either segregated current pension assets, or unsegregated current pension assets, and also the potential to defer a capital gain (deferred notional gain) on the unsegregrated non-current assets beyond the 2016/2017 year, meet with an adviser who is top of these super rules and/or see the following government documents:
- The Explanatory Memorandum accompanying the legislation (Chapter 3), and/or meet with an adviser who is on top of these superannuation rules
- Latest super changes: ATO Guidance Notes and Law Companion Guidelines
- LCG 2016/8 Superannuation reform: transfer balance cap and transition-to-retirement reforms: transitional CGT relief for superannuation funds
For general information about transition-to-retirement pensions, see the following SuperGuide articles:
- Less tax, more super? A transition-to-retirement pension is no longer the answer
- Super pensions: Reviewing the merits of keeping a TRIP
- TRIPs: 10 important facts about transition-to-retirement pensions
For general information about the $1.6 million transfer balance cap, see the following SuperGuide articles: