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.