Superannuation Changes from 1 July 2017 – the law has passed!

Created on December 15, 2016 1:25 pm

The 2016 Federal Budget’s superannuation reforms were legislated last week, so the haze of uncertainty surrounding these new changes has lifted.

Among these new laws is the provision of Capital Gains Tax (‘CGT’) Relief. This allows the cost base of assets to be re-allocated from the pension phase, back to the accumulation phase, in order to comply with the $1.6m transfer balance cap rulings.

What is the $1.6m transfer balance cap?

The $1.6m cap is a limit that an individual can transfer into pension phase from 1 July 2017. Any excess amount will be maintained in an accumulation account (where earnings are taxed at 15%). If this applies to you, or any other member of your superannuation fund, financial advice should be sought now, well before 30 June 2017, in order to allow sufficient time to plan for this measure.

What is CGT Relief?

Currently, any Capital Gains incurred on the disposal of assets that support a pension – whether it be an Account Based (‘ABP’) or Transition to Retirement Pension (‘TTR’) – are exempt from tax. However, the new rules no longer allow for income tax exemptions relating to TTRs and the $1.6m transfer cap from 1 July 2017 – this will limit the CGT exemptions to funds going forward, hence the introduction of the CGT Relief.

Under the CGT Relief rulings, from 9 November 2016 to 30 June 2017, complying superannuation funds will now be able to ‘reset the cost base’ of assets that are reallocated from the retirement phase to the accumulation phase.

Two forms of CGT Relief are available depending on whether the fund is adopting a ’segregated’ or ‘unsegregated’ method of asset accumulation within the self-managed fund (‘SMSF’). These methods are also known as the ‘proportionate’ method or ‘actuarial’ method respectively.

Segregated Funds

The segregation method will not be available to funds with at least one member in pension phase who has a total superannuation balance of more than $1.6m (across all funds they are a member of) from 1 July 2017.

Unsegregated Funds

Under the legislation, an SMSF Trustee may elect to obtain CGT Relief to reset the cost base of an asset to its market value as at 1 July 2017. The following prerequisites apply:

  • The fund must calculate a notional gain on the proportion of the asset that is effectively attributable to the accumulation phase as at 30 June 2017;
  • If not deferred, the fund must add this notional gain to its net capital gain (or loss) for the 2017 financial year which effectively crystallises the tax liability that would have arisen if that asset had been sold in the 2017 financial year;
  • The deferred notional gain can be carried forward for an indefinite period or until sale date.

Can you elect which assets have their cost base reset?

Yes, this election may be applied on an asset by asset basis however the relevant asset must have been held by the fund on 9 November 2016.

When does the election to reset the cost base need to be made?

On or before the tax return lodgement due date for the fund’s 2016/17 income tax return and will be irrevocable.

When does the election to defer the CGT from the cost base reset need to be made?

The election to “opt out” to pay the tax until the asset is sold must be made in the 2016/17 income tax return.

Example

Joy and Peter have an SMSF and their superannuation balances are $1.8m each as at 30 June 2016, of which 95% is supporting their respective Account Based Pensions. The fund’s assets have always been unsegregated and include:

  • Shares in company XYZ that were bought in 2010 for $500,000
  • The shares are expected to have a market value of $2m on 30 June 2017 resulting in an estimated ECPI of 70% (as a result of both members will exceed their $1.6m Transfer Caps)
  • The shares are expected to be sold for $4m on 30 June 2020

Option 1: Cost base reset and election to defer

If the Trustees chose to apply the CGT Relief, then in the 2020 financial year the fund’s assessable income would increase by $475,000 as follows:

  • Deferred notional gain: the fund’s assessable income would increase by $75,000 (being the $2m – $500,000) x 5% plus
  • Current year gain: $400,000 (being $4m – $2m) x 2/3 x 30%.

Option 2: Cost base reset and no deferral election

Should the Trustees decide to reset the cost base but not to defer the CGT on the reset, the same total amount of assessable Capital Gain is declared, however it is split across two years – $75,000 in the 2017 financial year and $400,000 in the 2020 financial year.