SMSFs which intend to apply the transitional CGT relief provisions will need to take care that they do not inadvertently cause the fund to become ineligible.

The eligibility trap impacts SMSFs using the proportional method on 9 November 2016 to calculate exempt pension income.

Overview

 

Under the transitional CGT relief reforms, a fund will be able to apply CGT relief to reset an asset’s cost base. This is where a member chooses to commute a pension and transfer benefits back to accumulation phase due to the introduction of the $1.6M transfer balance cap on 1 July 2017.

For a full discussion of these concessions please see the FirstTech fact sheet ‘Transitional CGT relief: $1.6m transfer balance cap’.

To apply the CGT relief measures a fund will need to satisfy certain eligibility requirements. This will depend on whether the fund uses the segregated or proportional (unsegregated) method to calculate its exempt income.

Funds using proportional method

 

Where a fund was using the proportional method on 9 November 2016, the transitional CGT relief eligibility requirements include that an asset must not become a segregated current pension asset at any time between 9 November 2016 and 30 June 2017.

In this case, it’s important to note that an asset can automatically convert to being a segregated current pension asset. This is in situations where a fund ceases to hold any accumulation assets and 100% of the fund’s assets are used to support superannuation pensions.

Take an example where a fund had members in both the accumulation phase and the retirement phase. The member in the accumulation phase used 100% of their benefits to commence an account based pension between 9 November 2016 and 30 June 2017. The fund would automatically convert to using the segregated assets method from that time – as all of the fund’s assets would now be used to support superannuation income streams.

 

In this case, a fund that was previously using the proportional method as at 9 November 2016 would now fail the eligibility criteria to apply the relief. This is due to the fact that all of the fund’s assets will have become segregated current pension assets prior to the end of 30 June 2017.

It’s also important to note that as the fund was using the proportional method on 9 November 2016, it would not have the option of applying the eligibility criteria for funds using the segregated assets method on 9 November 2016 as the fund will not have held any segregated current pension assets as at that date.

Eligibility trap

 

Funds using the proportional method on 9 November 2016 that intend to apply the transitional CGT relief provisions should therefore ensure they don’t inadvertently convert to using the segregated assets method prior to 1 July 2017.

For example, this could occur where any remaining accumulation interests in a fund are:

  • used to commence a superannuation income stream
  • withdrawn and paid as lump sums
  • rolled over to another superannuation fund

 

Where any of these were to occur it would cause all of a fund’s assets to automatically convert to being segregated current pension assets. This would then cause a fund using the proportional method to fail the CGT relief eligibility criteria.

It is therefore critical that a fund intending to apply the CGT relief exercises caution before allowing any members to commence a pension or withdraw or rollover any accumulation benefits prior to 1 July 2017.

Potential solution

A strategy that may be effective at avoiding this eligibility trap, is to ensure the fund maintains a small accumulation account for at least one of its members during the period between 9 November 2016 and 30 June 2017.

This will ensure the fund is able to continue to apply the proportional method and will avoid any assets inadvertently converting to segregated current pension assets.

 

 

Please follow and like us:
error