ATO clears up confusion over CGT relief detail

“In particular, there still appears to be significant confusion over which method must be used when applying the CGT relief,” Accurium said.

A recent update on an ATO webpage has fuelled confusion as the page suggests a link between the method used for a fund’s exempt current pension income (ECPI) calculation and how they apply the CGT relief.

Headings on the page say ‘If you calculated your ECPI using the proportionate method’ and ‘If you calculated your ECPI using the segregated method at 9 November 2016’ when referencing the method you are able to use to apply the CGT relief.

Accurium said this may have raised confusion in a scenario where an SMSF was solely supporting pension assets at 9 November 2016, but after this date once again had an accumulation interest and assets were no longer solely supporting pensions, for example after commuting a pension to comply with the transfer balance cap, and the SMSF chose to use the unsegregated method for ECPI over the entire 2016-17 income year.

This method is consistent with the ATO’s compliance approach for 2016/17, it said.

Accurium said this seems to imply that the cost base reset net gains would be subject to the actuarial tax exempt percentage determined under the unsegregated method for ECPI.

“While this would benefit funds with material capital losses, which they could carry forward, for the majority resetting the cost base of assets in a gain position it would mean paying some tax,” it explained.

“It had always been our understanding that CGT relief was applied based on the status of assets at 9 November 2016, as defined by the ATO’s view of the law on segregated pension assets, not driven by how an SMSF actually claims ECPI in 2016-17.”

Accurium said it contacted the ATO for clarification on the application of CGT relief in this scenario.

“They have confirmed with us that the method for applying CGT relief should be based on their view of the law of when a fund has segregated current pension assets at 9 November 2016,” Accurium said.

“The ATO’s compliance approach to ECPI in 2016-17 means that the method used to claim ECPI will not impact the required CGT relief methodology.”

As a result, SMSFs in this scenario, Accurium said, must apply CGT relief using the segregated method because, in the ATO’s view, the assets were segregated current pension assets or solely supporting pensions, at 9 November 2016.

“The cost base would be reset at the time assets cease to be segregated current pension assets, with the gains [and] losses disregarded and not included in assessable income,” it said.

“The SMSF could choose to claim ECPI in line with the ATO’s view of the law by using a combination of the segregated and unsegregated method in 2016-17, or it could use unsegregated method over whole year by taking advantage of the ATO’s compliance approach.”