ATO highlights important mechanics with CGT relief
The ATO has reminded SMSF practitioners to consider factors such as the CGT discount when making decisions about the CGT relief with clients.
Speaking in an ATO webinar, the tax office’s director of technical leadership Helen Morgan explained that for the segregated relief, the fund is taken to have sold an asset immediately before the asset ceases being a segregated current pension asset and then been repurchased immediately after.
For proportionate relief, the fund is considered to have sold the asset immediately before 1 July 2017 and repurchased it just after the sale.
“It’s this resale and repurchase that has the effect of resetting the cost base because when the fund sells the asset, it has the CGT consequence that reflects its existing tax treatment, [so] a capital gain on a segregated asset is disregarded and the capital gain on an unsegregated asset has an exempt proportion applied to it,” Ms Morgan said.
Therefore, when the fund repurchases the asset, it is a new CGT asset for the fund with a new cost base that will equal the asset’s market value.
“These mechanics mean there are some other factors that trustees should take into account when considering applying CGT relief,” Ms Morgan said.
“Firstly, if CGT relief is applied to an asset that a fund has held for more than 12 months, a resulting capital gain will qualify for the 33 and a third per cent discount.”
Conversely, because the asset becomes a new CGT asset, it must be held for at least 12 months after the date of the reset in order to qualify for the 33 and a third discount when the asset is disposed of.
Ms Morgan noted that because these assets are considered new assets, the indexation method is no longer available, even if the asset was originally acquired before 11.45am on 21 September 1999.
She said there are also some important practical details to take into account for proportionate funds applying the CGT relief where the fund is considering deferring the capital gain.
“Where a fund calculates the amount of the capital gain they are going to defer and the asset has been held for more than 12 months, they can apply the 33 and a third per cent discount. The fund also applies the exempt proportion to determine the proportion of the capital gain that does not qualify for ECPI,” Ms Morgan said.
“However, the fund cannot reduce the capital gain by any capital loses, either those from other CGT events throughout the 2016-17 year or capital loses carried forward from a previous income year. The effect of these points is that the amount that is deferred reflects the capital gain that would have actually been accessible in 2016-17 for that particular asset.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.