Trusts at risk of ‘CGT relief mismatch’, warns lawyer
With the CGT relief only applying to the cost base of units from a unit trust and not the cost base of the underlying assets, some SMSF trustees are seeing a mismatch in values when applying the relief, says an industry lawyer.
DBA Lawyers’ director Daniel Butler said one of the biggest issues with the super reforms in regards to trusts has been the fact that “you can get an uplift in the cost base of the units to the unit trust, but you don't get a cost base uplift of the assets owned by the unit trust”.
“Let’s say 10 years ago the SMSF happened to have $1 million and purchased a property via a non-geared unit trust. So the super fund subscribed for $1 million worth of units in the non-geared unit trust,” Mr Butler explained.
“So this unit trust then purchased a property for $1 million and 10 years later the property doubles in value so the property is now worth $2 million and the units, if you stepped up the cost base of your units under the transitional capital gains tax relief, you've got a cost base reset on your units to $2 million. [However], your unit trust still has a cost base of only $1 million in respect of the underlying property owned by that unit trust.”
If the trust then sells that property, there will be a capital gain of $1 million and that capital gain is assessable to the fund because the capital gain is distributed to the fund as net income of the trust, and therefore the fund can end up with a “mismatch with the capital gains tax relief”.
“However, if you wind up the unit trust in the same financial year that you sell the property, you can then potentially claim a capital loss on the cancellation of the units,” he said.
“So when you cancel the units, when you wind up the unit trust, if that is done in the same financial year that you sell the property and you distribute the capital gain before winding up the trust, a capital loss can offset the capital gain so you minimise the impact of CGT to the fund.”
Mr Butler added that “in practice, however, not everyone has the flexibility of winding up the unit trust in the same financial year as the trust may have other assets or the contract settles after the end of the financial year as the purchaser, for instance, had a delay in obtaining finance.”