URGENT SUPERANNUATION TAX BULLETIN - NOVEMBER 2016

SUPERANNUATION BILLS

Two superannuation bills have passed through both houses in Parliament and will now be presented to the Governor-General for assent. This newsletter discusses CGT Relief for relevant funds.

SUPERANNUATION SMSF CGT RELIEF UPDATE NOVEMBER 2016

SMSF’S with member balances in excess of $1.6m or transition to retirement pensions will be adversely impacted by the law changes that have passed the senate and take effect from 1 July 2017 as previously tax free assets will now potentially be taxable. However relief is available but action may be required before 1 July 2017.

The relief is designed to ensure capital gains accrued after 1 July 2017 are taxable but capital gains accrued prior to this date get recognition for the fact they were wholly or partially tax free under the old legislation.

The relief is in allowing SMSF’s to reset the cost base of assets purchased prior to 9 November 2016 but the reset must be elected by 30 June 2017.There are two choices:

• The fund opts in so all eligible assets have their cost base reset. This election must be made by the due date of lodgement for the SMSF 2017 tax return.
• The fund elects on an asset by asset basis. This will be preferable where some assets have a market value below cost base.

SEGREGATED FUNDS

These are predominantly SMSF’s which are wholly in pension phase but includes any funds who have segregated pension and accumulation assets and will apply at a point where segregation ceases at any time between 9 November 2016 and 30 June 2017. Therefore the majority of funds who need to consider strategies around this method will be those wholly in pension phase with member balances over $1.6m. Also the pension needs to have been in place before 9 November 2016.

The treatment is that cost base of an asset that is rolled back into accumulation has its cost base reset to the market value at the time of the fund ceasing to be in segregation. For most clients this will be 30 June 2017 at the time of the roll back to a $1.6m pension balance. However clients need to be aware that if they are a segregated fund and make a contribution after 9 November 2016 they effectively cease to be a segregated fund so could trigger the reset early being the date of the contribution.

For those funds that will continue as segregated funds the only assets being reset are the assets rolled back to accumulation.

The alternative is that if a fund takes no action in relation to asset segregation and so in effect reverts to a proportional fund, then all assets become eligible for an uplift as all assets cease to be segregated. This will apply for funds wholly in pension phase with balances over $1.6m as a roll back will need to take place on 30/6/17 so segregation ceases at that point and only gains accrued from 1 July 2017 will be taxable on a proportional basis as determined by an actuary certificate in the year of disposal.

A word of warning on Transition to Retirement Income Streams (TRIS). If your fund is a TRIS and 100% in pension phase it is not subject to the $1.6m cap so there will be no automatic roll back. Failure to reconstruct your pension could mean you miss out on the CGT uplift so action needs to be considered now.

PROPORTIONATE METHOD

This applies to funds in a mix of accumulation and pension phase who have an actuarial certificate for the 16/17 year of greater than 0% and the asset has not been a segregated asset any time between 9 November 2016 and 30 June 2017. 

It should be noted the pension need not have been in place before 9 November 2016 but the ATO has issued a warning on funds converting pensions solely to benefit from the uplift as Part 4a tax avoidance could apply.

Assets will in effect will be revalued at 30 June 2017 but we need to take into account the taxable component as per the actuary certificate. For example if an asset has a cost base reset of $100,000 and if fund is 40% taxable there is an unrealized gain of $40,000 so tax has to be paid on the notional cost base reset.

You will have the choice to pay the tax up front with the 2016/17 tax return or to carry forward the $40,000 gain until the asset is sold. 

An important strategy consideration is the expected future taxable percentage of the fund as determined by balances in pension phase being tax free and accumulation balances taxable. If you expect the tax percentage to increase you will be keen to reset cost bases and lock in the tax amount. This could be where you have a large pensions now but with the new rules will be forced to have a substantial shift to accumulation.

The opposite effect may occur where one member is in pension phase now and one in accumulation but going forward both will be in pension phase so the taxable percentage could drop substantially. In these circumstances you may not want to reset cost bases to crystalize the tax.

So the choice is to crystalize the gain at the current tax percentage or choose not to reset the cost base and be assessed a gain on the original cost base at the tax percentage at the time of disposal.

THE BOTTOM LINE

Any client who has a pension in place and whose members balances in all superannuation funds exceed $1.6m will need to have a review to determine the best strategy. Additionally those clients who have reached preservation age, which is 56 from 1 July 2016, may want to give consideration as to their options as they are eligible for a pension conversion upon turning 56.

Disclaimer- The material contained in this newsletter does not constitute advice. D P Loewy & Co Pty Ltd is not responsible for any action taken or reliance on any information in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation.