The clock is ticking for self-managed super fund trustees who want to apply for capital gains tax relief under transitional provisions that began on July 1, the SMSF Association has warned.
SMSF Association chief executive John Maroney says: “Some trustees have a false belief that CGT relief can be applied at any stage during this financial year. This is not the case. Trustees of a complying SMSF must make an election for CGT relief in the approved form contained within the CGT schedule of their 2016/17 fund income tax return.”
Under the transfer balance cap rules that started on July 1, a member may need to reduce amounts supporting retirement phase super income streams.
They may do this by transferring amounts back to accumulation phase or withdrawing amounts from super.
The Government is providing transitional CGT relief for assets that will lose the tax exemption in complying with the new transfer balance cap.
Trustees can choose to apply CGT relief if they held the asset throughout the period from November 9 last year to June 30. Trustees need to do this before the date on which they are required to lodge their fund’s 2016/17 tax return.
Maroney says: “The irrevocable election for CGT relief must be made on or before the day a trustee is required to lodge the fund’s 2016/17 income tax return, and for some trustees that is just weeks away, on October 31.”
Applying CGT relief will reset the cost base of an asset to its market value. This is where you reallocate or re-apportion assets from retirement phase to accumulation phase.
In its guidance on the CGT issue, the ATO emphasises that relief is not automatic. It must be applied for.
The ATO provides the following example:
- John is 65 years old, is retired and has $2 million in a retirement phase account in March 2017.
- One of the assets of John’s SMSF is a property purchased in 2002 for $300,000 and currently valued at $500,000.
- The trustee transfers the property out of the pool of segregated current pension assets supporting the income stream. The asset is now a segregated non-current asset and CGT relief is available.
- The fund applies for CGT relief and the cost base is reset to its market value of $500,000. The $200,000 capital gain is entirely disregarded. The fund will need to hold the asset for at least 12 months after the “deemed sale” to qualify for the CGT discount when disposing of the asset.