Author: Emma Partenza, Manager, TAG Financial Services
When the Federal Government introduced Simple Super in 2017, any amounts that were held in pension phase above the general transfer balance cap (which was $1.6M at the time), had to be commuted to accumulation to comply. As a portion of those investment earnings would no longer be tax exempt, in compensation a capital gains tax reset was on offer, allowing Trustees to increase the cost base of the investment to its market value on 1 July 2017 to minimise any potential future CGT arising.
CGT Relief
Application of CGT relief was not automatic and trustees who applied CGT relief have it documented in the fund’s 2017 capital gains tax schedule. This choice was irrevocable. Trustees had two options – to either pay or defer the CGT tax liability arising from increasing the investments cost base to its market value.
Payment required the applicable CGT liability to be paid as part of the 2017 income tax obligations of the Fund.
This blog will focus on those SMSFs who “deferred” their liability.
Trustees who deferred CGT liability
Where trustees deferred the CGT reset tax liability to the future, the tax liability will be included in the overall CGT tax liability calculation upon realisation of the investment.
In many instances, the circumstances of the SMSF may have changed and potentially funds are now fully in retirement phase (with 100% ECPI).
Regardless of the current structure and make-up of the fund, the fund is still liable for this CGT liability even where the fund may currently be 100% in pension. The fund will still have a taxable income and a tax liability it is liable to pay.
How to track CGT deferred tax liabilities
Software platforms, such as BGL, trace the deferred CGT liability and incorporate it into the tax liability when the investment is ultimately sold. Reports can be generated that show the deferred CGT liability that you can use for planning purposes where a trustee is contemplating sale of an investment.
Should your systems and records not capture this data, it’s imperative as trustees that these records were kept as part of the trustees’ ongoing duties and obligations, and they are required to manually apply the tax upon realisation.
Example
As from 30 June 2017, GAT Superannuation Fund had a member in retirement phase and a member less than their preservation age whose benefit was in accumulation. The fund’s assets consisted primarily of a property and cash.
As the member in pension phase had a benefit of greater than $1,600,000, he was able to reset the cost base of the property due to having to commute $600,000 of his benefit back to accumulation phase.
Therefore, they chose to defer the CGT tax liability. It was calculated as follows:
100% pension phase
In cases where SMSFs are in full pension phase when an investment is realised, this does not alleviate the fund’s liability to pay the tax. The CGT liability was deferred in 2017 on the basis of an obligation to pay it upon realisation of the asset. The current status of the fund does not nullify the obligation to be liable for this tax in the future.
Using the above example, let’s assume that the accumulation member has now reached preservation age and commenced an account-based pension. For the 2023/24 income year, the Fund is 100% in pension mode, and the above asset is sold.
ECPI will be calculated on the realised gain, as far as any gain was derived since 30 June 2017. The $36,000 deferred tax will not be subject to the ECPI calculation and sits on top of this.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2024. Please do not reproduce without the expressed written consent of the author.