Why you might need some CGT relief from 1 July
The new super reforms could result in some hefty CGT bills for the unprepared.
The federal government has persistently justified its super reforms by telling us that many of the changes to super coming up on 1 July 2017 don’t affect too many people. This may be true, but those who are impacted have some major decisions ahead of them. The truth is, the numbers of Australians who need to review their super situation isn’t exactly tiny. It’s estimated that of 580,000 Australian SMSFs, up to 1 in 3 could be materially affected by the new $1.6m transfer balance cap rule1. That’s about 200,000 people who should be making appointments with their financial adviser.
Many more investors, thinking that their super balance may not be near $1.6m or that they have no plans on making large contributions, might think the reforms have very little to do with them. But it’s best to be sure. We recommend, if you’re nearing retirement age, no matter how little you think the upcoming changes will affect you, to get some professional advice (link to contact info). If you do need to act, any major decisions will need to be made soon, to be in place by 1 July.
“We recommend, if you’re nearing retirement age, no matter how little you think the upcoming changes will affect you, get professional advice.”
Transition to Retirement Pension (TTR pension)
TTR pension funds are great, because they give you options. You have the option to work part time while maintaining your income or continue working while supplementing your existing income. Or (most popular), salary sacrifice into your super account (which means tax exempt earnings can earn more tax-exempt earnings) while you receive concessionally taxed income from your TTR pension1.
TTR have been very popular, offering Australians the chance to try out retirement without retiring, accessing their super and taking advantage of tax concessions too. But that’s all changing from 1 July 2017. Under the new rules, earnings on a TTR pension will be subject to 15% tax instead of being tax exempt. This leaves you with several alternatives. You could decide that even with the extra tax a TTR pensions is still right for you, you may consider retiring early (before 1 July 2017) so you can continue receiving a tax exemption on earnings, or you may choose to cease your TTR pension and return it to accumulation phase. This is a decision best made with the help of your financial adviser.
Any individuals with an SMSF who have chosen to cease their TTR pension and return the assets to accumulation will have to consider CGT tax implications. This is because any gains on assets in accumulation are subject to 10% CGT. A great number of individuals were counting on moving smoothly from TTR and receiving tax free earnings and income, so to suddenly be subject to CGT on earnings is not part of their retirement planning. To counter this, the new super reforms also come with CGT relief.
Why else might an individual need CGT relief?
So, the cessation of a TTR pension might be cause for CGT relief. Are there any other situations where it may be called for?
Case Study: Beverley has an SMSF with $2.4m in assets in her super pension account. As of 1 July 2017 to comply with the transfer balance rules (link to prior blog?) she must only have $1.6m in this account. She must decide which assets to commute back to accumulation phase. Her fund includes an asset held for more than 12 months with an unrealised gain of $400,000. If Beverly returns this asset into accumulation after 1 July 2017 she will be subject to a hefty CGT tax bill of $60,000.
What transitional CGT relief is available
Transitional CGT relief has been brought in as part of the super reforms specifically to assist individuals (like Beverley) who must reduce their super balance below the $1.6m transfer cap balance, and/or are choosing to cease their TTR pension because earnings are no longer tax exempt. Earning on assets brought back into accumulation phase will be subject to 15% tax on earnings and 15% CGT (10% if held in an SMSF) unless you take advantage of this relief.
If you have held an asset for over a year in a super account, you now have the option to reset the cost base for certain, identifiable assets within the account, reducing your CGT liability if the value of that asset is realised and commuted back into accumulation. You must identify these assets before 1 July 2017 and notify the Commissioner for Taxation of your intentions2. You can choose to defer recognising a capital gain until the asset is sold.
Back to Beverly: Beverly identifies the asset (or assets) she is commuting to accumulation and notifies the Commissioner for Taxation that it will cease to be a segregated asset and return to accumulation (as required by the super reforms)3. Now her asset with the $400,000 capital gain is deemed to have been sold and repurchased at the 1 July 2017 market rate. This is now the cost base from which capital gains will be calculated.
You must choose exactly which assets will be returned to accumulation and commit to an eventual CGT liability in the future when you do realise the asset3.
Case study continued: On 3 July 2018 Beverley sells her asset for $75,000 more than its value at 1 July 2017. Because she has held the ‘new’ asset for over 12 months and has an SMSF she is entitled to the 1/3 discount on earnings for CGT calculations. Beverley is subject to a tax bill of $7,500. This is significantly less than the $60,000 CGT she was potentially subject for in the first example.
When you wouldn’t use the CGT relief
If an asset is in capital loss it’s not a great idea to use the relief as the cost base will reduce from its position at 1 July 2017, and if it does grow in value creating a comparatively larger capital gain when realised.
Trying to take advantage of CGT relief beyond trying to achieve fairness around the new transfer balance and TTR pension tax rules is not recommended. The rules must not be applied to assets which are not affected by complying with either of these reforms2. If you’re found to have received excessive benefits from transactions around these changes you may be subject to anti avoidance rules.
Don’t delay, it’s time to act
The rules on CGT relief are complex and advice is essential4. Most affected investors will find they have several options and multiple decisions to make. In some cases, only time will confirm you’ve made the right or wrong choice. If you have a super balance over $1.6m or close to it, or a TTR pension account do not delay in seeking advice. The end of the financial year is looming large now and any analysis and decisions that relate to the any of the new super reforms should be made soon.
The super experts at Modoras have already prepared many of our clients for the upcoming changes. We can help you too. Contact us on 1800 888 803.
“The end of the financial year is looming large and any analysis and decisions relating to any of the new super reforms should be made soon.”
Over to you
Decided what to do with your TTR yet? Got your superannuation balance under control? Do you feel on top of the upcoming reforms or completely unprepared?
IMPORTANT INFORMATION: This blog has been prepared by Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licences (No. 233209), located at Level 3, 50-56 Sanders St, Upper Mt Gravatt Q 4122. The information and opinions contained in this fact sheet are general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this fact sheet can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.