CGT relief – five traps emerging at the pointy end of the year

We are definitely at the business end of 2017/18 when it comes to discovering just where the submerged rocks lie for CGT relief under the 2017 Superannuation Reforms.

New tips and traps emerge all the time and we’ve shared below just five that have come to our attention as we help advisers, accountants and trustees navigate the rules and lodge their 2016/17 annual returns.

Which aspects of the CGT relief are a “choice”?

Funds can choose whether or not they adopt the CGT relief.

They can also choose whether they do so for all or just some assets.

And they can choose whether (under certain circumstances) tax on any capital gains triggered as part of opting into the relief is dealt with in 2016/17 or deferred until the asset is sold in the future. 

But they can’t choose which method applies. Whether it is the so-called “segregated method” or the “proportionate method” will be a matter of fact and will depend entirely on whether or not a particular asset was entirely devoted to providing pensions on 9 November 2016:

• If it was, only the segregated method is ever possible for those assets – never the proportionate; and
• If it was not, only the proportionate method is ever possible for those assets – never the segregated method.

And of course it’s entirely possible that neither method is available if the fund or asset doesn’t meet the conditions required for the applicable method.

The interplay between the method available for CGT relief and the method used to calculate a fund’s tax exempt income (ECPI) in 2016/17

While the CGT relief method is not something funds can choose, they can make some choices about how they claim their ECPI in 2016/17 while the ATO is not devoting compliance resources to ensuring that their view of how the law works is applied (see our article ECPI – what is different in 2017/18 to understand that ATO view). In fact many funds might use both methods to claim their ECPI in 2016/17 depending on the circumstances.

However, this does not change anything about their CGT relief – the segregated or proportionate method will apply based on their position at 9 November 2016 no matter how they claim their ECPI in 2016/17.

Dealing with losses when carrying forward gains under the proportionate method

For some funds it will make perfect sense to opt into the CGT relief on assets that are currently in a loss position where the proportionate method applies. But those losses are then recognised in full in 2016/17; they cannot be deferred in the same way as capital gains.

For example, consider a fund that will opt in to CGT relief for two assets – one with an unrealised gain of $100,000 and one with an unrealised loss of $40,000. Both have been held for more than 12 months and the fund’s actuarial percentage for 2016/17 is 75%.

It is tempting to assume that if the trustee intends to defer the capital gain trigged by adopting the relief, the following amount would be reported as the “deferred notional gain” on the fund’s 2016/17 annual return:

($100,000 - $40,000) x 2/3 x (1 – 75%) = $10,000

But in fact this is quite incorrect.

The fund should instead report a capital loss of $40,000 and a deferred notional gain of:

$100,000 x 2/3 x (1 – 75%) = $16,667

This deferred notional gain would be recognised (and taxed) when that asset is eventually sold. The $40,000 loss must be recognised immediately. It would be used to reduce normal capital gains made in 2016/17 and carried forward in the usual way if the gains were not enough to use it up in full. Importantly, however, it would be entirely excluded from the deferred notional gain calculation.

Is CGT relief really worth it if both members only have $1.5m in super pensions?

CGT relief is not always valuable (and in fact we explain a number of cases where it is not in our CGT relief technical paper – see below). But it is also easy to under value it when it doesn’t look all that useful right now.

If the two members above were receiving a transition to retirement income stream during 2016/17, CGT relief is still available even though their balances were less than $1.6m at 30 June 2017. 

If the members have now retired (ie post 1 July 2017) and there is little chance that their balances will increase above this level in the future, it is tempting to imagine that the CGT relief is not particularly valuable. Surely the fund will be 100% in pension phase in the future anyway?

But remember that when one of the members dies, it is entirely possible that the survivor will wind down some of their own retirement phase pension so that they can keep the deceased’s pension running and leave as much as possible in superannuation. At that point the fund will return to having a combination of accumulation and pension accounts – CGT relief would once again be valuable. Don’t underestimate the impact that future events have on the value of the decisions being made today.

Oops – I missed it the first time

The decision to opt in to the CGT relief for a particular asset is an irrevocable one. An amendment to the tax return can’t change this.

However, the ATO has recently clarified that where the tax return has been lodged with (say):

• no election to opt in made at all; or even
• a response that indicates the fund has specifically chosen NOT to opt into the relief

an amendment can be submitted that effectively changes this to opting in. (We expect the argument is that the irrevocable part of the election can only ever apply to a positive choice to take up the relief. No decision or even a decision not to opt in doesn’t constitute an election for this purpose.)

So if your fund has mistakenly ignored CGT relief and already lodged their 2016/17 return, it’s not too late to change things. If your fund has already lodged a return with a positive election to opt in, then unfortunately that cannot be changed.

If you’re struggling with CGT relief, you’re not alone. Heffron has helped countless advisers, accountants and trustees understand the rules and make their decisions. We can review a specific fund’s circumstances and provide a report on which method applies together with our recommendation as to whether the fund opts in, defers etc. We have guides you can use to explain the rules for clients, minute templates and technical papers. Let us help you deal with CGT relief quickly, efficiently and cost effectively so that you can get back to the important work of getting the most out of SMSFs for yourself or your clients.