CGT failures triggering ‘unnecessary tax bills’
Professionals’ treatment of capital gains tax (CGT) cost-base uplift for SMSFs remains a source of significant confusion, and some are making “expensive mistakes” for their clients.
Many professionals failed to appropriately analyse asset positions before the lodgement of their client’s 2017 SMSF tax return, potentially resulting in previously tax-free capital gains becoming taxable, or capital losses being wasted.
“Unfortunately we’re seeing more people whose advisers have made expensive mistakes when applying the rules on the CGT cost-base uplift on assets held in their SMSF,” BDO partner Chris Balalovski told SMSF Adviser.
“These decisions, once elected in the 2017 tax return are irrevocable and binding with the ATO.
It means people are missing out on locking in tax-free capital gains forever, or are triggering unnecessary present or future tax bills,” he said.
Specifically, Mr Balalovski is finding advisers had not properly set up the pre-conditions for the availability of the CGT cost-base uplift.
“Even where the pre-conditions have been satisfied, many advisers aren’t adopting a comprehensive approach to determining which assets of the SMSF it should be applied to. That is, they’re simply adopting a view that assets with unrealised capital gains will have their cost-base uplifted and those with unrealised capital losses won’t,” he said.
“Being a one-off binding decision with the ATO, it can have significant financial consequences to an individual’s SMSF, such as creating immediate or longer-term tax burdens. Those tax burdens will either have an obvious impact on the superannuation balances of the current members of SMSFs, or will impact on the amounts received by their beneficiaries in the event of their death,” he said.
Best practice for advisers in these cases includes completing a comprehensive assessment of every asset held by a client’s SMSF and the personal circumstances of the members and their family. Analysis should address matters such as whether it’s expected that the asset will be disposed of at some time, and whether any of the members of the SMSF will be drawing pensions at the time of the disposal, Mr Balalovski said.
Mr Balalovski stressed advisers should not be adopting a view that assets with unrealised capital gains will always have their cost-base uplifted and those assets with unrealised capital losses won’t.
CGT has been an ongoing area of confusion and uncertainty for the SMSF profession, and one of the number-one sources of error and enquiry throughout 2017.
In September last year, Hayes Knight’s auditing arm reported a “tsunami” of errors related to CGT, with about 70 per cent of auditors performed containing CGT-related failures.
