Accurium speak with ATO to clear up latest confusion on CGT relief | Accurium

The super reform’s capital gains tax (CGT) relief continues to dominate queries received by Accurium as professionals look to complete their clients SMSF annual returns for 2016-17. In particular, there still appears to be significant confusion over which method must be used when applying the CGT relief.

Confusion around method for claiming CGT relief 

It came to our attention that an update made to the ATO webpage on Transitional CGT Relief in mid-February may have fuelled some confusion. The updated page suggests a link between the method used for a fund’s 
exempt current pension income (ECPI) calculation and how they apply the CGT relief. Headings say ‘If you calculated your ECPI using the proportionate method’ and ‘If you calculated your ECPI using the segregated method at 9 November 2016’ when referencing the method you are able to use to apply the CGT relief.

This may have raised some confusion around the scenario where: 

  • an SMSF was solely supporting pension assets at 9 November 2016, but after this date once again had an accumulation interest and assets were no longer solely supporting pensions, for example after commuting a pension to comply with the transfer balance cap, and 
  • the SMSF chose to use the unsegregated method for ECPI over the entire 2016-17 income year despite having periods where the fund was solely in pension, by taking advantage of the ATO’s compliance approach for 2016-17.  

We have seen many funds implement this approach. Would these funds be required to use the proportionate method for CGT relief since they used the proportionate method to claim ECPI? 

This would imply the cost base reset net gains would be subject to the actuarial tax exempt percentage determined under the unsegregated method for ECPI. While this would benefit funds with material capital losses (which they could carry forward), for the majority resetting the cost base of assets in a gain position it would mean paying some tax. 

It had always been our understanding that CGT relief was applied based on the status of assets at 9 November 2016, as defined by the ATO’s view of the law on segregated pension assets, not driven by how an SMSF actually claims ECPI in 2016-17. 

ATO response

We contacted the ATO for clarification on the application of CGT relief in this scenario. They have confirmed with us that the method for applying CGT relief should be based on their view of the law of when a fund has segregated current pension assets at 9 November 2016. The ATO’s compliance approach to ECPI in 2016-17 (see our blog The facts on claiming ECPI for FY17 for details) means that the method used to claim ECPI will not impact the required CGT relief methodology. 

The ATO noted that this is also stated on their page Actuarial Certificates which outlines their compliance approach. This says:
SMSF trustees should know that for the purposes of claiming CGT relief, an SMSF in these circumstances will still be considered to have switched from the segregated method to the proportionate method if a member of a SMSF that is 100% in pension phase commuted an amount back to accumulation to comply with the transfer balance cap, which commenced on 1 July 2017.
As such, the fund in the scenario above must apply CGT relief using the segregated method because, in the ATO’s view, the assets were segregated current pension assets (solely supporting pensions) at 9 November 2016. The cost base would be reset at the time assets cease to be segregated current pension assets, with the gains/losses disregarded and not included in assessable income. The SMSF could choose to claim ECPI in line with the ATO’s view of the law by using a combination of the segregated and unsegregated method in 2016-17, or it could use unsegregated method over whole year by taking advantage of the ATO’s compliance approach.
To summarise... 
CGT relief is based on whether an asset is a segregated pension asset or an unsegregated asset at 9 November 2016. If assets were solely supporting pension assets at 9 November 2016 the segregated method for CGT relief must be used. For funds claiming ECPI under the unsegregated method using the ATO’s compliance approach in 2016-17 this could mean the method used for CGT relief and that used to claim ECPI will be different. This is ok, but does not change the method that must be used for CGT relief.
If you have a fund which falls into the above scenario and you use automated processes or software to administer your funds, we recommend that you review your annual returns to ensure that capital gains and losses are correctly disregarded under segregated CGT relief and excluded from the assessable income used for calculating ECPI under the unsegregated method.
If you have any questions about applying the CGT relief don’t hesitate to give us a call.

The information in this document is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be financial product advice, tax advice or legal advice and should not be relied upon as such. The information is general in nature and may omit detail that could be significant to your particular circumstances.  While all care has been taken to ensure the information is correct at the time of publishing, superannuation and tax legislation can change from time to time and Accurium is not liable for any loss arising from reliance on this information, including reliance on information that is no longer current. Tax is only one consideration when making a financial decision. We recommend that you seek appropriate professional advice before making any financial decisions.