SMSFs warned on CGT trap with capital losses
Where clients using the proportionate method have large capital losses and elect to use the CGT relief, paying the tax this year rather than deferring could result in adverse tax consequences, warns a technical expert.
Heffron SMSF Solutions head of customer Meg Heffron explained that clients who plan to apply the CGT relief might be looking at their actuarial percentage for 2016/17 and their likely actuarial percentage next year, and trying to decide whether to pay the tax this year or defer it.
“I've had a number of clients say to me 'look my actuarial percentage, it's 99 per cent, it's so little, I'm just going to pay the tax this year, because I can't be bothered maintaining the records’,” Ms Heffron told delegates at the Class Connect Conference.
While in many circumstances this may be fine, she said, if the client has large carried forward losses, this could negatively impact them in future years.
“The reason is, if you decide to pay the tax this year, it's not a notional gain anymore, it's a real gain and it'll use up those losses,” she said.
“For example, let’s say a client had large losses last year at July 2016 and no more gains this year because nothing was sold. If nothing else had happened you would expect to have carried forward losses at the end of the year of $500,000 exactly what you had at the beginning.”
If the actuarial percentage is 99 per cent, and the client decides to opt into the CGT relief, and they’ve got notional gains of $300,000 which are all of the accrued gains on assets that were held at 9 November 2016, it would be only a small amount of tax to pay, she said.
“[However], look what happens to those losses if we make that choice; we offset the full $300,000 in gains against the carried forward losses, which means we only get to carry forward $200,000 in the future,” she explained.
“That's because they effectively become real gains, it's just as if you actively sold all of those assets and made that gain. So you'll come down to $200,000 in carried forward losses.”
If the tax is paid now, said Ms Heffron, then the client won’t have to pay any more tax after their 2016/17 tax return, but the client won’t be able to hold onto the losses.
“If we deferred it then we do have a little bit more to pay. We've got gains of $200,000, where we've carried the notional gains amount forward, but look at how small it is, because we get to apply the actuarial percentage, we get to apply the two-thirds discount - we only have to carry forward that tiny little bit, which of course is trivial and we'll basically hang on to those losses,” she said.
“Capital losses have become handy now because lots of our clients who were thinking I'm never going to pay tax again in my super fund, they now have accumulation accounts, so carried forward capital losses have suddenly become things to hang on to at all costs.”
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.