With all the changes in the SMSF space, it is now more important than ever to ensure your firm is informed regarding CGT relief and the transfer balance cap. All the new super reforms now mean SMSF members and trustees are more reliant on SMSF professionals advice and guidance.
The new reforms are applicable to SMSF’s with one or more pensions, and will need to take appropriate action to ensure they are in line with the new requirements prior to lodging the 2017 income tax return. Below is a summary of the elements of the Transfer Balance Cap, CGT Relief and Transition to Retirement Pensions (TRIS) which apply from 1 July 2017.
Transfer Balance Cap
- The $1.6 million transfer balance cap measure is a limit imposed on the total amount that a member can transfer into a tax-free pension phase account from 1 July 2017
- There are two caps which relate to the transfer balance cap:
- General Transfer Balance Cap – refers to the total cap of $1.6m
- Personal Transfer Balance Cap – refers to the individual’s cap, which is proportionally indexed and carried forward if the balance is not utilised
- Action must be taken whilst completing the 2017 accounts to ensure member pension balances are no higher than $1.6m at 1 July 2017 (i.e. pension commutations need to be made at 30 June 2017)
- Any transfer into a pension account will increase the members personal transfer balance cap, whilst there are only certain circumstances that will decrease the members personal transfer balance cap.
- The transitional CGT relief (i.e. cost base reset rules) allows SMSF’s to reset an asset’s cost base to market value
- CGT relief can be used where the fund has an ABP over $1.6m or a TRIS of any balance
- CGT relief is only available for assets owned by the fund on or before 9 November 2016 (being the date the legislation entered Parliament)
- The cost base reset process can occur at any point from 9 November 2016 to 30 June 2017, meaning the availability of market values during this time is the key
- Two CGT relief methods can be used;
- Segregated method:
You can apply CGT relief ONLY to the value of the amount that is commuted back to accumulation. For example if $400k is commuted back to accumulation, CGT relief can be used for up to $400k of the fund’s assets.
- Unsegregated method (also referred to as the proportionate method):
The fund can use CGT relief for any or all of its assets whether in accumulation or pension phase.
- Segregated method:
- The test of what status the fund takes (segregated or unsegregated) is based on the status of the fund from 9 November 2016 to 30 June 2017:
- For the fund to be deemed a segregated fund for CGT Relief purposes, it must be segregated from 9 November 2016 to 30 June 2017, and remain segregated for the FULL period to 30 June 2017.
- If a fund is segregated on 9 November 2016, then becomes unsegregated during the year and remains unsegregated until 30 June 2017, then the fund will be deemed an unsegregated fund, and the proportionate method can be used.
- If a fund is unsegregated on 9 November 2016, but became segregated (100% pension) up to 30 June 2017, CGT relief cannot be applied. A fund must be segregated for the full pre-commencement period, being 9 November to 30 June 2017 for the segregated method to be applied. Because the fund does not meet the criteria for the proportionate method either, No CGT relief can be used.
- From 1 July 2017, the transfer balance cap limits the total amount a person can transfer into the retirement phase of a superannuation fund.
- A TRIS is not considered to form part of the retirement phase of superannuation if the member:
- has not attained age 65; or
- has satisfied the definition of retirement, terminal medical condition or permanent incapacity, but has not notified the superannuation income stream provider for the superannuation income stream of that fact.
- If the member has a TRIS and meets the retirement phase definition (point b (i) or (ii) above), documentation will be required to be prepared to convert the TRIS to an ABP (it does not automatically convert).
- A TRIS that does not form part of the retirement phase will be taxed like an accumulation account, and therefore lose its tax exemption.
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