There has been uncertainty around whether funds which were solely in pension phase at 9 November 2016 would be eligible to apply the CGT relief where assets ceased to be segregated, prior to the fund ‘doing anything’ to comply with the transfer balance cap at 1 July 2017.
Where a fund was solely supporting account-based pensions at 9 November 2016 and a member is either:
commuting an amount back to accumulation phase prior to 1 July 2017 in order to comply with the transfer balance cap,
has a transition to retirement (TTR) income stream that will not automatically convert to a retirement phase income stream at 1 July 2017
the Trustee can elect to apply the segregated method for CGT relief at the date assets cease to be segregated current pension assets. This CGT relief allows the Trustee to reset the cost base of eligible assets, effectively locking in gains earned to date as tax free.
Where a fund was solely in pension phase at 9 November it is quite possible that a contribution will be received after this date, but prior to the Trustee deciding how they will be complying with the transfer balance cap. There has been concern that if the fund received a contribution prior to commuting balances to accumulation phase in order to comply with the transfer balance cap, or 30 June in the case of a TTR pension, then the fund would not be eligible to apply the CGT relief. This is because when a contribution is received the fund will have both pension and accumulation liabilities and, unless a conscious decision is made to segregate certain assets to support pension liabilities, the fund’s assets will be treated as unsegregated assets.
Many funds will be making a strategic decision to make commutations as late in the year as possible to help maintain the best tax exempt percentage in the 2016-17 year. Indeed, with the changes to contribution rules coming in at 1 July 2017 we can also expect many funds to be making significant contributions prior to 30 June to take advantage of the current non-concessional contribution caps.
It was initially suggested that the fund would need to keep assets supporting pensions separate from the incoming contribution in order for them to remain as segregated current pension assets, and therefore eligible for the CGT relief. Alternatively, the fund would need to commute pensions in order to comply with the transfer balance cap at the date that the contribution was received. This would mean more work for Accountants and Trustees.
During the ATO’s webinar on CGT relief in April 2017, ATO Director of Technical Leadership, Helen Morgan clarified the ATO’s position and it is a good outcome for SMSF Trustees. Ms Morgan recognised that where a fund receives a contribution after 9 November this may affect its segregation causing confusion around the application of CGT relief. Ms Morgan said:
“The relevant date for CGT relief is where a fund switches from the segregated method to the proportionate method and the relevant date in that instance is the date where the assets cease being segregated current pension assets,”
“This is provided that the member does comply with the transfer balance cap or TRIS reforms. It’s not sufficient just to be currently segregated, and make a contribution to the fund and not have to do anything in order to comply with the superannuation reforms going forward,”
This is a welcome clarification and means Trustees and their Advisers can be safe in proceeding with contributions for funds that were in a full pension phase at 9 November 2016.
Those funds which are segregated for CGT purposes, but subsequently make a contribution and do not keep pension assets separate from accumulation will remain eligible to apply the CGT relief on eligible fund assets. They will still need to commute pensions prior to 1 July 2017 to comply with the transfer balance cap or have a TTR pension that won’t be in retirement phase at 1 July 2017. The cost base of an asset applying the CGT relief will be reset at the date that the contribution (after 9 November) is received as this is the date that the asset ceased to be a segregated pension asset.
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.