The ATO does not accept partial segregation of assets, so there are a lot of issues to address when SMSF trustees are dealing with bulky assets such as real estate.
Mr Butler said the ATO confirmed in TD 2013/D7 that an SMSF trustee cannot partially segregate an asset such as property. While this tax determination was withdrawn, it was subsequently confirmed in other ATO materials, he said.
The draft legislation states that where a member has more than the $1.6 million in super and they are in retirement and paying a pension then their SMSF cannot elect to segregate.
“The difficulty is that the ATO deem you to be segregated; the ATO say if your fund is in entirely in pension, that is 100 per cent of the fund is in pension, then you are deemed to be segregated,” said Mr Butler.
“So there is a bit of a conflict with the ATO; the ATO is saying one thing and the proposed law is saying another thing.”
Mr Butler said SMSF trustees should be able to rely on the proportionate method but it is not clear at this point what will happen.
“We’d like to see the ATO confirm that partial segregation is appropriate,” he said.
If partial segregation is not allowed by the ATO following the legislation of the proposed $1.6 million transfer balance cap (TBC), then it will be unclear what action trustees with bulky assets can take, he said.
“It might mean a lot of people have to reset more than their excess TBC amount,” he said.
“Let’s say you’ve got more than $1.8 million, you’ve got to bring it down by $200,000 but you may not be able to bring it down perfectly by $200,000 you might have to bring it down by say $500,000 because you have a rental property valued at $500,000 that needs to be transferred out of your pension account.”
In these circumstances where removing an asset takes the trustee well below the transfer balance cap, the trustee should still be able to get a CGT reset on that amount once the draft legislation is introduced into Parliament and prior to 1 July 2017.
“Advisers will need to carefully manage the new CGT cost base reset rules for every client who is approaching or in excess of their $1.6m TBC. Indeed, in the case of a couple with combined balances, these should also be reviewed in case one dies in the near future sending the surviving spouse beyond their $1.6m cap. The complexity in the detail means that CGT elections may need to be made on an asset by asset basis for each relevant member,” said Mr Butler.