SMSF members having a TRIS without meeting a condition of release with nil cashing restrictions at 30 June 2017 could potentially consider applying CGT relief, because their TRIS is moved into accumulation phase, and out from the retirement phase. No commutation is required for CGT relief to apply.
When a member with a TRIS meets a condition of release with nil cashing restrictions, such as turning 65, retirement, permanent incapacity, and terminal illness, the same TRIS can continue to stay in the retirement phase without having to be converted to an account based pension. In this case, CGT relief will not apply.
CGT relief is a choice, and irrevocable. When a fund chooses to apply CGT relief to an asset, the asset is deemed to be sold and repurchased, which creates a notional gain/loss, and resets the cost base of the asset at the market value on 30 June 2017 if proportionate method is used, or cessation time if segregated method is used. CGT relief is a transitional measure, it is only relevant before the lodgement due date of the 2017 fund tax return.
One of the two methods can be used depending on the fund position as at 9th November 2016. The method to be used is not a choice. If the assets of the fund are segregated on 9 November 2016, the segregated method must be used. If the assets of the funds are unsegregated on 9 November 2016, the proportionate method must be used.
CGT Relief for TRIS – Segregated Method
Under the segregated method, where the fund had segregated assets supporting pension liabilities (including ABP, TRIS and other eligible pensions) at 9th November 2016, deemed sale and reacquisition of the asset is at the time the asset ceased to be a segregated current pension asset.
Common triggers of cessation time are contributions and pension commutations. If a TRIS is commuted and rolled back to accumulation at 1 March 2017, cessation time is 1st March 2017. The market value of 1 March 2017 is used as the new cost base. If a TRIS does not commute before 30 June 2017, then the cessation time is automatically 30 June 2017.
Trustees may choose to continue to use the segregated method or adopt the proportionate method. The proportionate method appears to deliver a better outcome, as all the assets are eligible for CGT relief and all capital gains are disregarded.
As capital losses are disregarded under segregated method as well, there is no advantage in creating deemed losses.
CGT Relief for TRIS – Proportionate Method
Under the proportionate method, the fund may choose to apply CGT relief to any, or all assets; the choices are not restricted to the amount of TRIS. To qualify for the CGT relief under this method, the fund needs to be unsegregated during the whole pre-commencement period, that is from 9 November 2016 to 30 June 2017. If in this period, the fund moved into full pension phase, i.e. commenced pensions with all accumulation balances, then CGT relief is lost.
If a fund moves into full pension phase or has a higher tax-exempt proportion in the future before selling the asset, the same asset could pay less or zero tax in that environment. There is no advantage to lock in a large gain when the future tax is minimal.
A fund may choose to pay deemed capital gains tax in the current period or choose to defer the gain. If the fund has capital losses either carried forward from previous years or triggered in 2016/17, it is always better to defer the gain. When the fund elects to defer the gain, no capital loss of any nature can be applied to offset that gain. The net capital gain after applying discount and pension exempt factor is deferred. When the asset is disposed, capital losses can be applied against the deferred gain.
For example, in 2016/17 a fund has ECPI factor 80%, carried forward loss $100K, and deemed gain of $100K, by paying deemed capital gain in the current period, all the carried forward loss would be used up. Assuming discount is applied, if the deemed gain is deferred ($13.3K = $100K (1-80%)*2/3), the fund would still have a $86.7K loss to use after applying carried forward loss.
Where applying the relief triggered a deemed loss, the loss must be recognised in the current period, it can be used to offset any current year realised capital gains, or carried forward. A deemed loss can’t be deferred. A fund with large realised capital gains in 2016/17 may choose to apply CGT relief on assets in a loss position.
CGT relief is contained in Subdivision 294B of the Income Tax (Transitional Provisions) Act 1997
We review all CGT relief for your funds as part of our audit services.