As part of the new superannuation reform, eligible Self Managed Superannuation Funds (SMSFs) can utilise the transitional Capital Gains Tax (CGT) relief to reset an asset’s cost base to market value either at the cessation time or 30 June 2017. The cessation time occurs when the asset is transferred back to accumulation phase or when the SMSF adopts the unsegregated method to calculate the exempt current pension income (ECPI) for the SMSF. Given the majority of SMSFs are currently applying the unsegregated ECPI method, SMSFs may incur a notional capital gain under the unsegregated CGT relief method.

There has been some confusion over when and how to apply the carried forward capital losses at the end of the 2017 financial year and at realisation when electing CGT relief. The following tables summarise the application of the existing capital loss at 30 June 2017 and at realisation:

If the asset has a deemed capital gain, the gain is reduced by capital losses, CGT discount (if eligible), and by the exempt portion for the 2016/2017 income year.  The SMSF trustee can choose to pay tax on the notional capital gain in 2016/2017 (including applying current and prior year capital losses to reduce the gain), or the SMSF trustee can choose to disregard the notional capital gain in 2016/2017 and instead defer to recognise the notional capital gain until the income year the asset is sold in. In calculating the “deferred” notional capital gain, the SMSF trustee cannot offset any current year or prior year capital losses. Capital losses are not taken into account in calculating the deferred notional capital gain but may be applied against the amount when it is brought to account in a later income year.

When the asset is physically sold in the future, a subsequent capital gain or loss on any future CGT event will be determined based on the reset cost base of the asset.  The exempt amount will be determined based on whether the SMSF is using the segregated or unsegregated method at the time of the future CGT event.  If the SMSF has deferred any 2016/2017 notional capital gain, then the gain will be recognised in the year the asset is physically sold.  Capital losses can be applied against this deferred amount, but the future CGT discount and exempt portion cannot be applied to any of the deferred notional 2016/2017 gain.

Example: X SMSF is eligible for CGT relief and chooses to apply CGT relief.

Example 1

In 2019, SMSF realises all assets which had applied CGT relief to them in 2017:

Example 2