Transitional CGT relief

Transitional CGT relief for super fund trustees that are required to adjust their asset allocations.

On this page

• When CGT relief isn’t available
• CGT relief and the general anti-avoidance rules
• Criteria for eligibility for CGT relief
• If you calculated your ECPI using the segregated method at 9 November 2016
• If you calculated your ECPI using the proportionate method
• If you changed from proportionate to segregated method between 9 November 2016 and 30 June 2017
• Deferring the capital gain under the proportionate method
• Funds that are ‘100% in pension phase’
• What if the fund received a contribution during the pre-commencement period?
• Effect of applying CGT relief
• Making a CGT relief election
• How do I make the choice?
• Making a choice is final

The objective of the capital gains tax (CGT) relief provisions is to provide temporary relief from certain capital gains that might arise as a result of complying with the introduction of the transfer balance cap, or the transition-to-retirement income stream (TRIS) reforms.

As a trustee of a fund, you should ensure that any choices regarding the application of CGT relief to assets are consistent with this objective.

Due to the introduction of the transfer balance cap on 1 July 2017, a member may have needed to reduce amounts supporting retirement phase super income streams to ensure their total amounts in retirement phase did not exceed $1.6 million. CGT relief may be available in these situations.

From 1 July 2017, assets supporting a TRIS lost their tax exemption on earnings, unless the TRIS is in retirement phase. A TRIS is no longer considered a super income stream in retirement phase, unless your member satisfies a condition of release with a nil cashing restriction. CGT relief may be available where assets were supporting a TRIS that is not in the retirement phase.

For funds with a member who was in receipt of a TRIS that continues to be in the retirement phase, CGT relief may be available where amounts supporting this TRIS are reduced in order to comply with the transfer balance cap rules.

When CGT relief isn’t available

CGT relief is only available in the circumstances outlined above. If a fund did not have members making changes to reduce amounts supporting retirement income streams below the $1.6 million transfer balance cap, or members with a TRIS who are affected by the changes, the trustee cannot apply CGT relief.

CGT relief will not be available to a fund purely because it needs to use the proportionate method to calculate exempt current pension income (ECPI) due to new restrictions. For 2017–18 onward, an SMSF trustee will be required to use the proportionate method if a member had a total superannuation balance over $1.6 million at the end of the previous financial year, and that member is receiving an income stream from any source.

Note that these restrictions only relate to the ability of an SMSF to segregate for the purposes of claiming ECPI. Even though the SMSF may be required to use the proportionate method to calculate its ECPI, the trustee can still decide which assets will support income streams for investment returns.

CGT relief and the general anti-avoidance rules

As previously noted, the CGT relief provisions have an intended purpose. Therefore, schemes designed to maximise an entity’s CGT relief or minimise the capital gains of existing assets in accumulation phase may be subject to the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936. An example would be creating the circumstances to give access to CGT relief.

The kinds of arrangements that the Commissioner will scrutinise carefully with a view to determining whether Part IVA applies will exhibit the following features:

• they place the taxpayer in a position to make the choice
• they go further than is necessary to provide temporary relief from CGT because members are complying with the reforms commencing, and
• they demonstrate that the dominant purpose of entering into the arrangement is to avoid tax.

See also:

• LCR 2016/8 Superannuation reform: transitional CGT relief for complying superannuation funds and pooled superannuation trusts (refer to paragraphs 42 to 50C for more information on the transitional CGT relief and anti-avoidance)

Criteria for eligibility for CGT relief

If you choose to use CGT relief, the way it will apply depends on the method you were using to calculate your ECPI at the start of the ‘pre-commencement period’. The pre-commencement period is from 9 November 2016 to 30 June 2017.

You may have calculated your ECPI by selecting specific assets to support your income streams (known as the segregated method), or by allocating a percentage of your income streams (known as the proportionate method).

If all members of the fund are receiving account-based income streams, and 100% of the fund’s assets are supporting these income streams, the assets will meet the definition of segregated current pension assets. This is known as being ‘100% in pension phase’. In this situation, we accept that the fund is using the segregated method, even though it doesn’t specifically identify its assets as segregated to support a particular income stream.

Some criteria must be met in all situations:

• your fund must have held the asset throughout the entire pre-commencement period
• your fund must have been a complying superannuation fund from 9 November 2016 until the date relief is applied.

If you calculated your ECPI using the segregated method at 9 November 2016

You are able to apply relief if you moved an asset from supporting the retirement phase to the accumulation phase before 1 July 2017, if your fund:

• used the segregated method throughout the pre-commencement period, and
• had a member who had to comply with the introduction of the transfer balance cap or TRIS reforms.

This resets the asset’s cost base to its market value at that time.

You are deemed to have sold and repurchased the asset for market value on the day it ceased to be a segregated current pension asset. The resulting gain or loss is entirely disregarded. This is consistent with the fact that the unrealised gain up to this point would have been exempt from income tax if the asset were sold on this day.

You should clearly document the date the assets ceased to be segregated current pension assets.

You can apply relief to some or all of the assets that were previously segregated, if your fund:

• used the segregated method on 9 November 2016
• switched to the proportionate method during the pre-commencement period or at the start of 1 July 2017 where the switch is due to assets supporting a TRIS that is not in the retirement phase, and
• had a member who had to comply with the introduction of the transfer balance cap or TRIS reforms.

Instead of transferring specific assets to support the accumulation phase, you may have switched to the proportionate method (for example, where you had large assets with high market values, but your members only needed to commute a small amount back to the accumulation phase, as assets cannot be partially segregated).

All your assets that were segregated to support income streams ceased to be segregated from the day you switched methods. This is the cessation time. You can choose to apply CGT relief to some or all of these assets to reset their cost base(s) to their market value at the cessation time. The gain or loss is entirely disregarded.

As you will start to have assets that support both accumulation and retirement phase interests, you are required to obtain an actuarial certificate to support the use of the proportionate method to calculate ECPI.

If you calculated your ECPI using the proportionate method

You can choose to apply CGT relief to some or all of your assets to reset their cost bases to their market values at 30 June 2017, if your fund:

• used the proportionate method throughout the pre-commencement period
• had a member who had to comply with the introduction of the transfer balance cap or TRIS reforms.

You may make a capital gain from this reset. Where these assets have only been partially supporting income streams, you may have to pay tax on some of the capital gain.

You can recognise any capital gain or loss in the 2016–17 year and the CGT discount may apply if you held the asset before 30 June 2016. The capital gain or loss is included in your net capital gains calculation for the year, alongside other capital gains or losses for the year, and any carried-forward capital losses.

Alternatively you can choose to apply the CGT relief and defer the capital gain. You need to calculate the capital gain as if it were not being deferred, taking into account any applicable discount, but not applying any capital losses. The calculated capital gain is then deferred and recognised in the year that you cease to hold the asset. You cannot defer a capital loss, although you can carry it forward under the ordinary rules for capital losses.

If you changed from proportionate to segregated method between 9 November 2016 and 30 June 2017

In these circumstances you are not eligible for CGT relief under either the segregated or proportionate method.

Deferring the capital gain under the proportionate method

If you choose to defer a capital gain that arises in applying CGT relief under the proportionate method, you must look at the capital gain to be deferred in isolation and recognise this gain in the year in which a ‘realisation event’ happens to the asset. Generally this will be when the asset is sold.

This is done by determining the ‘deferred notional gain’ for the asset. The deferred notional gain is calculated with the following steps:

1. First, determine the capital gain made on the deemed disposal. Any current year capital losses are not recognised to apply to this amount. Previous years' capital losses are also not applied in calculating the gain to be deferred.
2. If the asset was acquired before 30 June 2016, the CGT discount can be applied.
3. Then, apply the exempt portion for the 2016–17 income year.

When this asset is later sold, or another ‘realisation event’ happens to the asset, the deferred capital gain is recognised. This deferred gain will not be discounted in the realisation year, however it is to be reduced by capital losses made in that year as well as carried forward losses. Any exempt proportion applied for the realisation year does not apply to the deferred gain, as the relevant exempt proportion from the 2016–17 year was applied to this deferred gain.

Capital losses from CGT relief cannot be deferred, but they can be carried forward. Unlike a deferred capital gain, these losses are not reduced by the relevant exempt proportion for the 2016–17 income year.

Funds that are ‘100% in pension phase’

A fund is ‘100% in pension phase’ if 100% of the fund’s assets are supporting account-based income streams. In these cases, the assets meet the definition of segregated current pension assets. If a fund was ‘100% in pension phase’ during the pre-commencement period, and its members commuted amounts to the accumulation phase to prepare for the transfer balance cap, CGT relief may be available.

If the fund transferred specific assets to support these new amounts in the accumulation phase, the CGT relief is available for those assets provided the other eligibility criteria were met.

Alternatively, the fund may have chosen to adopt the proportionate method from that date. In this instance all of the fund’s assets ceased to be segregated current pension assets from that date, and so all assets are potentially eligible for CGT relief. The law does not restrict CGT relief to a particular value or asset in these situations.

What if the fund received a contribution during the pre-commencement period?

The contribution formed part of a new accumulation phase account for that member, as contributions cannot be added to existing income streams. This means that the fund stopped being ‘100% in pension phase’ from the date the contribution was received.

If the fund has clearly documented that it continued to set aside certain assets after it received the contribution, those assets can continue to be segregated current pension assets until a later date. The fund may then be able to access CGT relief if they subsequently switched to the proportionate method later in the pre-commencement period.

If there is no evidence of a decision to remain segregated, the assets ceased to be segregated current pension assets on the date of the contribution. CGT relief may be available on that date provided the other eligibility criteria are met.

Effect of applying CGT relief

The deemed sale when CGT relief is applied creates a capital gains event for that asset, and when the assed is deemed to be repurchased it has the effect of being a new asset for CGT purposes.

This means you will need to hold the asset for at least 12 months after this time to qualify for the CGT discount. Also, the indexation method for assets originally acquired before 21 September 1999 will no longer be available.

The deemed sale and repurchase only has consequences for capital gains tax – it is not considered an acquisition of an asset for any other purpose (such as the superannuation regulatory consequences of acquiring assets from a related party).

For assets like shares or units, CGT relief can apply at the parcel-to-parcel level, meaning the trustee can choose which particular shares in an overall holding to reset the cost base for. Note that for unit trusts, CGT relief applies to the units, and not the underlying assets held by the trust.

Making a CGT relief election

CGT relief is not automatic; it must be chosen by a trustee for a CGT asset. If CGT relief is chosen, the trustee will need to advise us using the approved form by completing the CGT schedule to the 2016–17 SMSF annual return on or before the day they are required to lodge. The lodgement date for 2016–17 SMSF annual return has been extended to 30 June 2018 for all SMSFs. This means trustees have until 30 June 2018 to lodge a return with an election for CGT relief, or amend a previously-lodged return in order to include an election if you hadn’t made it previously.

You need to keep appropriate records for each asset subject to the CGT relief and any deferred tax liability in accordance with your record keeping requirements.

How do I make the choice?

If you choose to apply transitional CGT relief to an asset, this creates a deemed 2016–17 CGT event. You must:

• answer ‘Yes’ at label G 'Did you have a capital gains tax (CGT) event during the year?' (Section B: Income, Question 11 label G) in the Self-managed superannuation fund annual return 2017
• indicate on the 2017 CGT Schedule that you are choosing to apply CGT relief.

You may need to include the amount of the resulting capital gain or loss on the 2016–17 SMSF annual return and the 2017 CGT schedule.

To report the CGT relief election into the CGT schedule you will need to complete the following fields:

• the election to apply for CGT relief (Question 8 label F)
• any deferred amount (Question 8 label G).

It is important to note that this means many funds which would not currently expect to complete the CGT schedule will need to do so if they wish to make an election to defer the CGT.

Making a choice is final

Once you have chosen to apply the CGT relief, the decision is not able to be revoked. If you lodged the 2016–17 SMSF annual return without making the election, you can amend the return within the time limits to make it. However you cannot amend to reverse the election once it has been made.

Find out about:

• For more on transitional CGT relief, refer to LCR 2016/8 Superannuation reform: transitional CGT relief for complying superannuation funds and pooled superannuation trusts
• For more on how to make the choice in lodging your 2016–17 SMSF annual return, refer to Self-managed superannuation fund annual return instructions 2017

See also:

• Claiming ECPI
• (including what counts towards your cap)
• LCG 2016/8A1 – Addendum Superannuation reform: transfer balance cap and transition-to-retirement reforms: transitional CGT relief for superannuation funds
• LCR 2016/9 Superannuation reform: transfer balance cap
• LCR 2016/10 Superannuation reform: defined benefit income streams – non-commutable, lifetime pensions and lifetime annuities
• LCR 2017/1 Superannuation reform: defined benefit income streams – pensions or annuities paid from non-commutable, life expectancy or market-linked products