‘Irrevocable’ CGT mistakes loom for SMSFs
A lack of understanding by SMSF practitioners and trustees about the two different tax treatments that apply in relation to the CGT relief has the potential to lead to “significant tax consequences” in future years, warns a consultant.
Miller Super Solutions founder Tim Miller says one of the reasons the CGT relief has caused so much confusion is because there are differences in how the relief applies, depending on whether the fund uses the segregated or unsegregated approach.
One of the differences is with the timing of when the relief applies, with trustees able to select a date where the fund is segregated. Alternatively, with the unsegregated approach, the relief is effective 30 June, Mr Miller told SMSF Adviser.
“I think there are a lot of people who don’t understand this, especially at the trustee level. Segregation in itself has always been a troubled area with regards to people’s understanding of it,” he said.
The treatment itself also varies depending on whether the fund is segregated or unsegregated.
“With one you ignore all of the capital gains and then the other one, being the proportionate method, you’ve obviously got to account for the capital gains, and you have to utilise any capital losses that are used in the current year, and you can defer the capital gains to future periods.”
“In regards to when people are using the proportioning, there’s also just a little bit of confusion around the different treatment of capital losses versus capital gains. So it’s more that from an application point of view, you could understand that it appears to be inconsistent, and so that’s going to create some form of accounting confusion for a lot of people, I suspect, if they choose to use the CGT relief.”
SMSF trustees also need to understand that they do not have to use the relief, and that it’s not mandatory, and they don’t have to use it for every asset.
“The biggest consequence [of getting the decision wrong] is that it’s irrevocable. Once you’ve made an election and chosen a date, that’s it – so you cannot unwind the transaction,” Mr Miller said.
“If you do it in an unsegregated environment, the main consequence is that you’re effectively affecting the future cost base of those assets. It’s not going to be a big deal from a pension point of view because you get the exemption on the sale of the asset anyhow, but certainly from the future cost base element, getting the date wrong could have some form of tax consequence in the future when you do eventually redeem those assets.”
For most clients, this wouldn’t be a large amount of money and it would only affect those with more than $1.6 million.
“It’s probably not that significant, but I suspect for clients with larger balances, there is some sort of significant tax consequence attached to it,” Mr Miller said.