The CGT relief provisions preserve the tax exemption on capital gains accrued, but not yet realised, on CGT assets held in ABPs and TRISs prior to 1 July 2017. The relief ensures that only capital growth post 1 July 2017 is taxed. The CGT relief applies differently depending on whether the SMSF has segregated assets or unsegregated assets. Unsegregated CGT relief is shown in the flowchart below:
An SMSF has unsegregated assets if all of its assets are pooled together and no particular asset is specifically allocated to support the retirement pension account and the accumulation account. This means the SMSF’s assets are supporting member accounts both in the retirement and accumulation phases. The unsegregated method provides the SMSF with an exemption from tax on investment income based on the portion of the SMSF’s assets that are funding the retirement pensions. The tax exemption is based upon an actuarial certificate which determines the amount of investment income that is exempt.
An SMSF trustee can choose to apply for CGT relief on some or all of the SMSF’s assets if the following conditions are met:
- The SMSF is a complying superannuation fund at all times during the pre-commencement period. The pre-commencement period begins on 9 November 2016 to just before 1 July 2017.
- The asset was not a segregated current pension asset on 9 November 2016.
- The asset was held throughout the pre-commencement period and was never a segregated current pension asset or a segregated non-current pension asset.
The unsegregated CGT relief is not automatic. SMSF trustees must elect for the relief to apply to the asset, using the Capital Gains Schedule, on or before the SMSF is required to lodge its 2016/2017 income tax return. A register of assets to which CGT relief have been applied should be created and retained as part of the SMSF’s records.
Below is the impact for trustees electing to apply the CGT relief at 30 June 2017 for a SMSF with unsegregated pension assets:
- The asset of the SMSF is deemed to have been sold and immediately repurchased on 30 June 2017.
- The CGT discount period on the asset is reset.
- The cost base of the asset is reset to the market value on 30 June 2017 as there is no need to apportion the cost base to reflect any portion supporting the accumulation phase.
- Under the unsegregated CGT relief, the SMSF’s investment income from assets that are supporting retirement pensions are partly disregarded from tax.
- Capital gains may be assessed during 2016/17 or deferred indefinitely until such time as the asset is sold. Capital losses are available to be offset against capital gains assessed during the 2016/17 financial year but cannot be offset against deferred gains. The CGT 1/3rd discount (if asset qualifies) and the Exempt Current Pension income proportion are applicable to the Deferred Gains.
The SMSF trustee(s) should consider evaluating the importance of carrying forward capital losses while deferring notional capital gains particularly if the fund has a large quantum of carried forward losses with a significant exempt current pension income (ECPI) proportion for 2016/17.