What is the CGT relief all about?
Superannuation funds that are paying pensions currently receive a very valuable tax break. They pay no income tax on rent, interest, dividends, capital gains etc. they earn on the assets they have invested to support pensions. What CGT relief do you get and what are the Segregated & Proportionate method? Read on:
If an asset is supporting a mixture of pension and non-pension (accumulation) benefits, some of this investment income is free of tax.
For some people this tax break will be wound back a lot from 1 July 2017.
1. If you are receiving a “transaction to retirement” pension this will stop being classified as a pension when it comes to working out how much of your fund’s investment income is free of tax; and
2. If you are receiving a “full” pension (ie. not a transition to retirement pension), you must make sure it’s not worth more than $1.6m at 1 July 2017. If your pension is bigger, you will need to reduce if beforehand. If you do that my taking money out of your pension but leave it in your super fund, that will mean some of your fund (the part that’s not in a pension any more) isn’t entitled to this special tax treatment. Overall, a similar portion of your fund will be devoted to paying pensions and so this reduced the amount of your fund’s investment that is free of tax.
This is a particularly big deal if you have assets that grown over time and you are expecting to sell them at profit (i.e realise a capital gain) in the future. The way the law works is that the amount of that profit or capital gain that is taxable depends on how much of the fund is in pension phase when the assets is sold, not what the fund looked like when the assets was bought or when it grew in value.
And this is the problem – if you have a transition to retirement pension or if you have a full pension but are winding it back a bit in preparation for 1 July 2017, less of your fund will be in pension phase in future. That means more your fund’s capital gains will be taxed at the time you sell an asset and realised a capital gain.
To ease the transition, the Government has specifically factored in some capital gains tax relief for people affected by the changes.
The idea is that the CGT relief will make sure that when an assets is sold after 1 July 2017:
1. Capital gains that built up after a changeover date in 2016/17 (open 30 June 2017)will be taxed based on how much of the fund is in pension phase at the time; while
2. Gains that built up beforehand will get special treatment to reflect the fact that they would have been partly or even entirely free of tax if the new rules hadn’t come in.
The CGT relief does this by allowing funds to change the amount of treated as an asset’s purchase price (or cost base) for capital gains tax purposes to whatever it was worth on the changeover date in 2016.17. This is called “resetting the cost base”. Unfortunately, it also re-sets the date on which the asset is treated as having been bought. This is important because your fund gets a special capital gains tax discount when it sells assets it has held for more than 12 months. So, if your changeover date is 30th June 2017, and you’re eligible for the CGT relief, you”ll be able to res-set your cost base to whatever your assets are worth on 30 June 2017 but you’ll have to hold them until 1 July 2018 before you get the discount.
Is my fund eligible for the CGT relief?
Firstly, to be eligible for the CGT relief you will need to be affected by the new super rules that are coming in from 1 July 2017. This means you must either:
1. Be receiving a transition to retirement pension; or
2. Have more than $1.6 m in “full” super pensions overall and need to wind some of them back in the fund in which you’re claiming the CGT relief.
You can’t claim CGT relief if, for example, you and your spouse are retired (so receiving full pensions) and you both have less than $1.6m in super pensions. (The Government’s argument is that you don’t need the CGT relief – your fund can keep all its pensions in place and so will continue to pay no tax n its investment income). If even just one of you has more than $1.6m in a full pension, you’re fine – your funds meets this first test.
Secondly, your fund needs to meet some specific conditions.
These specific conditions provide two methods (or pathways) for being eligible for the CGT relief – called the ‘segregated” method and the “proportionate” method. In theory, different assets in your fund could be eligible for the CGT relief under different methods. Mostly though, its the same method for the whole fund.