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:
- 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.
- If the asset was acquired before 30 June 2016, the CGT discount can be applied.
- 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.
Example:
Gary and Gillian are the members and trustees of their SMSF, the GG Superannuation Fund. The GG Superannuation fund has the following assets and member interests at 30 June 2017:
Member interests
Interest
|
Value
|
Gary – Account-based pension
|
$2,000,000
|
Gary – Accumulation
|
$500,000
|
Gillian – Account-based pension
|
$1,000,000
|
Fund Assets (~85% exempt)
Name
|
Cost base
|
Market value
|
Asset A
|
$1,150,000
|
$1,600,000
|
Asset B
|
$610,000
|
$700,000
|
Asset C
|
$900,000
|
$1,200,000
|
The GG Superannuation Fund uses the proportionate method to calculate its exempt current pension income, and has been doing so for several years. In 2016–17, the fund’s exempt proportion as calculated by an actuary is 85%.
On 30 June 2017, Gary commutes $400,000 out of his account-based pension, and directs it into his accumulation account.
CGT relief is available for all three of the fund’s assets as:
- the fund meets the object of the CGT relief provisions because Gary needed to commute amounts out of retirement phase due to avoid exceeding the transfer balance cap
- the assets meet the eligibility criteria for CGT relief because
- the assets were not segregated current pension assets at any time during the pre-commencement period (as the fund used the proportionate method for the entire income year)
- the fund held the assets for the entire pre-commencement period
- the fund’s 2016–17 exempt proportion was greater than nil.
The fund elects to apply CGT relief to all three assets, resetting their cost bases to their market values at 30 June 2017. The fund has capital gains for the three assets that are not disregarded:
Fund assets
Name
|
Cost base
|
Market value
|
Capital gain
|
Discounted capital gain
|
Asset A
|
$1,600,000
|
$1,600,000
|
$450,000
|
$300,000
|
Asset B
|
$700,000
|
$700,000
|
$90,000
|
$60,000
|
Asset C
|
$1,200,000
|
$1,200,000
|
$300,000
|
$200,000
|
The fund wishes to defer the liability for these capital gains, so it calculates a ‘deferred notional gain’ for each asset by applying the 2016–17 exempt proportion to the discounted capital gains to determine the portion that would not be exempt:
- Asset A – deferred notional gain = $300,000 × 15% = $45,000
- Asset B – deferred notional gain = $60,000 × 15% = $9,000
- Asset C – deferred notional gain = $200,000 × 15% = $30,000
- Total = $84,000
In the CGT Schedule to its 2016–17 self-managed superannuation fund annual return, the fund selects ‘Yes’ at label 8F – Have you chosen to apply the transitional CGT relief for superannuation funds?’, and includes $84,000 at label 8G – ‘Notional capital gain amount deferred’. The fund needs to keep records of the new cost bases of its assets so that it can calculate its capital gains tax correctly when assets are sold.
End of example