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CGT Relief Segregated & Proportionate Method

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.

By |May 23rd, 2017|Self Managed Super Fund News|Comments Off on CGT Relief Segregated & Proportionate Method

Government Budget May 2014 Superannuation Commentary

Government delivers tough 2014-15 Federal Budget

Refunds of excess non-concessional contributions, changes to the Super Guarantee and tighter rules on qualifying social security benefits were the main Budget announcements to impact on superannuation this year.  These changes, along with others, should provide a Budget deficit of just under $30 billion in 2014-15 with no surplus due anytime soon.

The key changes proposed for superannuation and social security are:
 

  1. Excess Non-Concessional Contribution Refunding

For any excess contributions made after 1 July 2013 that are over the non-concessional contribution (NCC) cap, the Government will allow withdrawal of the excess NCCs and any associated earnings from super.  Earnings withdrawn from the fund will be taxed at personal tax rates.  If the excess NCCsare left in the fund, tax will be paid on the excess at the top marginal tax rate.

  1. Rephasing Superannuation Guarantee

The Superannuation Guarantee (SG) Rate will increase to 9.5% from 1 July 2014, instead of remaining at 9.25% as the Government has previously indicated would occur as part of its mining tax repeal.  The Superannuation Guarantee rate will then be maintained at 9.5% until 30 June 2018, and on 1 July 2018 it will resume increasing by 0.5% increments until it reaches 12% in 2022-23.

  1. Increasing of Age Pension Age to 70 from 2035

The Age Pension age is to be lifted to 70 from 2035.  From 1 July 2025, the Age Pension qualifying age will continue to rise by six months every two years, from the qualifying age of 67 years that will apply by that time, to gradually reach a qualifying age of 70 years by 1 July 2035.  People born before 1 July 1958 will not be affected by this change. Also, there has been no change to the preservation age for accessingpreserved superannuation benefits.

  1. Indexing the Age Pension by the Consumer Price Index

The Age Pension is to be indexed to the Consumer Price Index (CPI) from 1 September 2017.  Currently, pension payments are indexed in line with the higher of the increases in the CPI, Male Total Average Weekly Earnings or the Pensioner and Beneficiary Living Cost Index.  This change will likely result in lower future pension increases.

  1. Resetting the Pension Deeming Rate Thresholds

The income deeming thresholds used in the pension income test will be reset to $30,000 for singles (currently $46,600) and $50,000 for couples (currently $77,400) from 20 September 2017. The deeming rules assume financial assets are earning a certain amount of income, regardless of the income actually earnedfor the purpose of determining eligibility to social security payments.  The Government is making this change to better target pension payments, by tightening the income test.

  1. Maintaining Eligibility Thresholds for Australian Government Payments for Three Years

Eligibility test thresholds for pension and pension related payments will be maintained for three years from 1 July 2017. Major pension related payments include the Aged Pension, Carer Payment, Disability Support Pension and the Veterans’ Service Pension.

  1. Commonwealth Seniors Health Card Changes

There are proposed to be a number of changes to the CSHC.  These changes are:

  • Indexing the current income limits for the CSHC by the CPI in line with its election commitment to do so.
  • Including untaxed superannuation income in the eligibility assessment for the CSHC from 1 January 2015.  All superannuation account-based income streams held by CSHC holders before the 1 January 2015 will be grandfathered under the existing rules.
  • The Government will achieve savings of $1.1 billion over five years from 2013-14 by ceasing the Seniors Supplement for holders of the CSHC from 20 September 2014.

How can we help?

If you would like some assistance with identifying how these recent changes are likely to affect your own retirement income planning, please feel free to give me a call to arrange a time to meet so that we can discuss their impact on your particular circumstances. We can then determine whether you need to make any changes to your existing arrangements.

By |May 16th, 2014|Self Managed Super Fund News|0 Comments

SMSF CHANGES 2013

ATO SMSF FINES AND PENALITIES

From July 1st 2013 the ATO will be able to directly tax and fine trustees, and potentially complicit accountants and advisors, for breaches in their fund. Fines start from $850 and, depending on the type and number of breaches, can extend into the tens of thousands of $$$. Before you ask, the answer is no: these fines cannot be paid for or claimed as an expense of the fund.

The new regime extends the ATO's power to enforce SMSF regulations for small to medium sized breaches instead of sanctioning funds as entirely non-compliant, or battling it out in the court system. As well as fines and taxes, the ATO may also demand trustees act to rectify breaches, or enforce mandatory education schemes.

By |June 17th, 2013|Self Managed Super Fund News|0 Comments

Super Tax and the Family Home

When the family home and super can incur tax

With property and superannuation the two most widely held and potentially valuable assets among the baby boomers, it makes sense that a portion of either of these could be passed to future generations.

While there is no such thing as death duty in Australia, the tax man could end up doing quite well from inherited property and super assets. When it comes to inheriting property and other investment assets, the taxing point is when the assets is subsequently sold.

Where a person inherits a family home, they have two years to sell it tax free. After that, the potential for capital gains tax largely depends on when the home was bought.

A house bought after 1985 and sold after the two-year-tax free period would incur capital gain tax on the difference between what it is sold for and what the deceased paid. If bought pre-1985, the duty would be levied on the difference between what it was sold for and the market value at the time of death.

Where a house is to be sold, he says, it is important to note it has to be sold and settled within the two-period after death to avoid tax.

If you sell the property one month before the two-year grace period, and the property has a standard 60 day settlement, then you could be liable for capital gains tax on a portion of any gain.

With an inherited investment property that is subsequently sold, the amount of tax will also depend on whether the property was bought pre-1985 or post-1985 in the same way as the family home.

When CGT is payable, there may be a 50 per cent discount if the asset is held for more than 12 months.

Although the general rule is that the discount is only available where the CGT asset has been owned by the taxpayer for at least 12 months, in the situation where a beneficiary of a deceased estate acquires a post 12-CGT asset within 12 months of the disposal they may be eligible for the CGT discount.

This is because assets acquired by the beneficiary will, for the purposes of claiming the CGT discount, generally be treated as having been owned by the taxpayer for at least 12 months, as long as the collective period of ownership of the deceased and the beneficiary is at least 12 months.

But a pre-CGT asset of a deceased person is taken to be acquired by the beneficiary at the date of the death of the deceased.

With super, the calculations around what tax may need to be paid by the beneficiary is more complicated, depending whether they are a dependant or non-dependant under the relevant legislation. There may also be life insurance arrangements.

Inheriting super money can involve hidden duty traps. A super fund may include contributions  that are fully taxed (employer contributions and salary sacrifice) and untaxed (such as additional tax-free contributions).

An adult beneficiary who received super benefits can pay tax anywhere between 0 per cent and 30 per cent depending on how the deceased made the contributions.

It depends on how the superannuation went in as to how it is taxed when it comes out. The tax implications of receipt of fully taxed contributions can have quite an impact on the benefit received from the fund.

A common strategy for retirees between 60 and 65 is to withdraw what would otherwise be a taxable component on death (tax free after age 60) and recontribute it, subject to contribution limits, as a non-concessional contribution. That part of any death benefit would be received by the beneficiary tax free.

As an additional strategy, super fund member could establish a second account-based pension which could potentially be 100 per cent pension which could potentially be 100 per cent tax free. The original account-based pension may still have a taxable component.

The taxable and non-taxable amounts between two pension accounts, the retiree could draw as such as they needed to live off from the pension with taxable contributions and the minimum from the other pension.

When it comes to death, it might be that the taxable component of someone’ super has been reduced to zero and anything that is passed on is duty free.

Maintaining assets in an estate for a period of time after death can also carry Ttax advantages.

For example, a beneficiary may inherit $100,000. If the assets are maintained in the estate, they are then allowed a period of up to three tax returns where any income is only taxed at individual tax rates. After the three tax returns they may be taxed at the top rate depending on circumstances.

 

 

By |June 16th, 2013|Self Managed Super Fund News|0 Comments

Super changes – Future Tax Bills

SMSFs face higher future tax bills after super changes

By Property Observer Friday, 05 April 2013

Property laden self-managed super funds face the prospect of higher tax bills following super changes announced by Superannuation Minister Bill Shorten last week. Mr Shorten announced that super income streams over $100,000 will be taxed at a concessional rate of 15% from July 1, 2014. For people with more than $2 million in super assets (such as investment property) supporting income streams, the reform will affect assets earning a rate of return of 5%. The most recent ATO figures for 2011 show that 28% of SMSFs now have account balances of at least $1 million. "From July 1, 2014, future earnings (such as dividends and interest) on assets supporting income streams will be tax free up to $100,000 a year. Earnings above $100,000 will be taxed at the same concessional rate of 15% that applies to earnings in the accumulation phase," said Federal Treasurer Wayne Swan in a joint statement with Mr Shorten last Friday. Treasury announced that special arrangements will apply for capital gains on assets purchased before 1 July 2014: For assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024; For assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and; For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gains. "These generous transitional arrangements will ensure that people who have already purchased superannuation assets will have ten years to decide whether they want to restructure their superannuation holdings, before their capital gains start to be affected," reads the statement. The reform will not affect the tax treatment of withdrawals. "Withdrawals will continue to remain tax-free for those aged 60 and over, and face the existing tax rates for those aged under 60." The government also announced that for people aged over 60, concessional caps will be increased from $25,000 to $35,000 from July 1. This concession will be extended to those aged 50 and over from July 1 next year. Prior to the announcement, the capital gains proposals were slammed by small business leaders. "As small business owners, our lives are based around our assets," Council of Small Business of Australia chief executive Peter Strong said. "It's almost an attack on small business." The supposed plan would see capital gains tax charged when properties move into the pension phase of an account, meaning SMSF owners would be charged more money as they near the point where they are able to draw funds. "When you have an asset like a property and it's an integral part of your business, it seems unfair to change the rules and then dictate when you can retire."

By |May 8th, 2013|Self Managed Super Fund News|Comments Off on Super changes – Future Tax Bills

Paying Benefits from a Self Managed Super Fund

As reported on the ATO Website 7/5/2013
Commissioner's foreword

At some stage your self-managed super fund will have one or more members enter the retirement phase. It also means you need to be aware of the additional responsibilities you have when you start paying retirement benefits to members of your own fund.

The strict rules governing self-managed super funds continue as you move out of the accumulation phase and move into paying benefits to your members.

You can pay retirement benefits in a number of ways. Whichever way you pay from your fund, you must ensure the relevant payment rules and regulations are being met. You are still responsible for the continued operation of the fund even if you use a tax, financial or superannuation adviser to help you manage it.

This publication is designed to help you meet your responsibilities in the retirement phase.

Chris Jordan

Commissioner of Taxation
Self-managed super and you

Like other super funds, SMSFs are a way of saving for your retirement. Generally, the main difference between an SMSF and other types of funds is that members of an SMSF are the trustees. This means the members of the SMSF run it for their own benefit.

SMSFs are not suitable for everyone and you should think carefully before deciding to set one up. It is a major financial decision and you need to have the time and skills to do it. There may be other, better options for your super savings. If you are considering an SMSF for your super savings, the publication Thinking about self-managed super (NAT 72579) provides you with some practical information. Licensed financial advisers, tax agents and accountants can also help you understand what is involved.

If you decide that an SMSF is the appropriate vehicle for your super savings, you need to ensure the fund is set up and maintained correctly so that it is eligible for tax concessions, can pay benefits and is as easy as possible to administer. Setting up a self-managed super fund (NAT 71923) provides some basic information on this and the steps you need to follow to set up the fund correctly.

Once your SMSF audit is established, you as trustee control the investment of the contributions and fund earnings. Your SMSF must have a trust deed that forms part of the governing rules for operating the fund. You must also prepare and implement an investment strategy and ensure it is reviewed regularly. There are rules and regulations you must follow to ensure the fund's assets are protected to provide benefits in retirement.

While contributions are being made to the fund it is considered to be in the accumulation phase. The publication Running a self-managed super fund (NAT 11032) explains the responsibilities and obligations of trustees operating an SMSF.

When one or more members retire, you as trustee need to understand and follow the requirements of the law and regulations governing the payment of benefits. This publication is designed to assist trustees who are required to make payments out of their SMSF. It is important to note the rules and regulations that apply to funds in the accumulation phase continue even when one or more members retire; however, additional rules apply to the retirement phase.

You should continually reassess the circumstances of the fund and each individual member to determine whether an SMSF is still the most appropriate option for your retirement savings. In some cases you may find that you no longer have the capacity to deal with the complexity or the time required to manage your SMSF.

You may decide that it is not cost-effective to continue to run your own fund. Depending on the circumstances it may be necessary to transfer member benefits to another complying super fund.

Other reasons why you might wind up your SMSF include when all members have left the SMSF (for example, they have rolled over their benefits to another fund or have died) or all the benefits have been paid out. Winding up a self-managed super fund (NAT 8107) details the process you need to follow to wind up your fund.

By |May 6th, 2013|Self Managed Super Fund News|Comments Off on Paying Benefits from a Self Managed Super Fund

SMSF Satisfaction Rates Soar

SMSF satisfaction rates soar above disgruntled retail and industry fund members: Roy Morgan (as reported in the Property Observer)

By Larry Schlesinger
Monday, 15 April 2013

The government's proposed changes to superannuation are likely to impact on the most satisfied account holders, the latest Roy Morgan Research Superannuation Satisfaction report suggests.

The government proposes a tax of 15% on super income above $100,000 per annum from July 1 2014, which is expected to impact on around 16,000 super funds with income-earning assets (such as property) of around $ 2 million or more – assuming a return of 5%.

Many of these 16,000 super funds are likely to be self-managed super funds.

According to Roy Morgan, over the six months to January, self-managed super funds, which have a growing proportion of their assets in direct property, remain the clear leader with a 72.2% financial performance satisfaction rating.

And satisfaction with the performance of SMSFS has been rising since about September last year.

In comparison, satisfaction with other fund types, where members have less control, has been declining since the GFC and continues fall.

Industry funds are a distant second with a satisfaction rating of 48.7% with retail funds further back (41.9%).

The results of the survey suggest on overall high-level of dissatisfaction with super fund performance with the satisfaction rating for financial performance of superannuation across all types of funds in the six months to January 2013 of just 46.6%.

Click to enlarge

The survey also found that satisfaction with financial performance of superannuation increases the bigger the super balance.

The highest satisfaction rating (65.7%) was for funds with balances higher than $500,000 with the satisfaction decline to 56.9% for funds with balances from $250,000 to $499,999; to 48.7% for fund with balances from $100,000 to $249,999 and to just 43.7% for funds with balances under $100,000.

Click to enlarge

The findings are based on over 30,000 interviews with people with superannuation.

"Our research shows that although there is a strong correlation between satisfaction with superannuation financial performance and the amount in super, the issue regarding who manages the super also has a major impact," says Norman Morris, industry communications director at Roy Morgan Research.

"It appears that satisfaction with superannuation has a lot to do with the level of engagement, which is higher among self-managed funds and higher balances.

"The poor satisfaction levels of Retail Funds across all balance levels obviously are of concern, considering that financial planners are more likely to direct their clients to them," he says.

Photo by Martin Howard, courtesy of Flickr.

 

By |April 22nd, 2013|Self Managed Super Fund News|Comments Off on SMSF Satisfaction Rates Soar

Assets-Pension-Income-Super

Assets  count with the aged pension

The aged pension is always changing and the increase to soon of $38.50 per fortnight for singles and $27 per fortnight for couples will help the increasing costs of living.

Two assessments are used for pensioners:

  1. Assets based

Assets cut-off point for a homeowner couple is currently $1,050,000 and $707,750 for a single pensioner.

If you do not own a home then these amounts will increase by around $140,000.

  1. Income Based

The income test cut-off point for a couple is $67,537 and $44,127 for a single pensioner.

Your financial assets are deemed to be earning 2.5% for the first $75,600 for a couple and $45,400 for a single pensioner and then 4% on the balance.

e.g for a couple with $300,000 in financial assets their deemed income would be $10,866 a year being 2.5% of the first $75,000 which would be $1890 and 4% on the remaining $224,400 which would be $8,976.

These will include all interest bearing deposits, debentures, shares, share trusts, and friendly society and insurance bonds.

However , it does not include property, annuities and money in account-based pensions.

These rates apply irrespective of the amount actually earned on investments, so pensioners actually earned on investment, so pensioners can gain an advantage if they can get safe returns that are higher than deeming rates.

Gifting – if you gift in the previous 5 years then they amounts will be treated as a deprived asset.

Once you receive a pension a single or a couple can make gifts totalling $10,000 a year or up to a maximum of $30,000 in any five years, without any adverse effect on their pension.

A single pensioner can earn $32,279 a year and pay no-tax.

A couple can have a combined income of $57,948 and pay no tax.

The pension starts to reduce for a single when income exceeds $3952 a year and for couples at $6968 a year.

Under the deeming rates that will take effect on March 20, these levels will be reached when total financial assets reach about $116,000 for singles and $202,000 for a couple.

The main reason to hold money in superannuation is minimise tax and get an advantage under the income test if you are receiving an income stream from your superannuation and it has a deductible component.

The deductible component is based on the purchase price of the income stream divided by your life expectancy.

Income-tested pensioners can potentially improve their Centrelink position by commuting and recommencing superannuation pensions to maximise deductible amounts.

Your life-expectancy falls over  time – the viability of this strategy depends on the value of the pension today versus the original purchase price.

By |March 13th, 2013|Self Managed Super Fund News|0 Comments

Latest Guide to Holding Insurance in an SMSF – Tax and other considerations

There are several benefits associated with acquiring insurance within an SMSF, such as life insurance and total and permanent disablement (TPD) insurance. For example, the benefits of acquiring insurance within an SMSF can include the following:

  • Cashflow benefits – holding insurance within an SMSF can provide a means of obtaining wealth when it is needed most (e.g. upon death, injury or illness) without creating a cash flow problem for people struggling during these hard economic times.
  • Deductibility of premiums – a complying superannuation fund can claim deductions for certain premiums that would not be deductible if they were personally incurred by a member.
  • Tax free insurance proceeds – generally, insurance proceeds received by an SMSF are tax  free (i.e. they are generally capital in nature and disregarded for CGT purposes
  • No upper limit on what can be paid out of fund (no RBLs) – there is broadly no longer a limit on concessionally taxed amounts that can be withdrawn from the super system by members who have satisfied a condition of release (e.g. where they have ‘retired’ or ‘reached at 65’) or by their ‘tax’ dependants (eg., spouses, financial dependants, etc)

TAX WARNING – New rules now require SMSFs to consider insurance

The Government has recently amended the SIS Regs (i.e.by introducing new Reg 4.09(e)) to require SMSF trustees to consider (from 7th August 2012) whether to hold a contract of insurance (e.g. life insurance) that provides cover for one or more of their members.

In particular, SMSF trustees will be required to consider whether to hold insurance for their members (having regard to a member’s personal circumstance) when they formulate, regularly review  and give effect to the fund’s investment strategy under SIS Reg 4.09
Different insurance policies that can be held by an SMSF Brisbane – an overview

Type of Insurance (1) Can an SMSF Hold this policy? Are proceeds assessable in SMSF? CGT exempt? ( 2) Deduction for premiums? Condition of release (COR)
Life Yes No Yes(S.118-300 ITAA 1997) Yes(S.295-465

 

 

ITAA 1997)

Death
TPD Yes No Yes(S.118-37 ITAA 1997) Yes(but it depends on the policy) Permanent incapacity
TMC Yes No Yes(S118-37 ITAA 1997) Yes(s.295-465 ITAA 1997) TMC
Trauma Yes No Yes(S118-37) ITAA 1997) No No specific COR applies (bit it might constitute TPD, TMC, temporary incapacity, etc.)
Income Protection Yes No Yes(S.118 – 305

 

 

ITAA 1997)

Yes(S.295-465

 

 

ITAA 1997)

Temporary incapacity

 

  • In addition, SMSF trustee can take out general insurance for other risks (e.g. to insure against public liability and associated risks with owning real estate).
  • The CGT provision outlined above are in the process of being amended. In the 2011-2012 Budget, the government announced that it will make minor extensions to the CGT exemptions to ensure that insurance policies owned by superannuation funds that were treated as being CGT exempt under the current CGT provisions and ATO administrative practices continue to be CGT exempt.

2.1  Life Insurance – death cover

If the life insurance cover in respect of a member’s death provides cover for risk only, then the premium is fully deductible.

However, if there is an investment component included in the policy, only a partial deduction maybe available (e.g. in respect of a whole of life or endowment policy, an SMSF can only claim a deduction for 30% and 10% respectively, of the premium for such policies.

Government abolishes the trading stock exception for most SMSF assets

Subject to certain exceptions, S.295-85(2) of the ITAA 1997 ensures that gains and losses made on CGT assets held by complying funds are taxed in accordance with the CGT rules rather than the general income and deduction provisions (e.g. s.6-5 and S.8-1 of the ITAA 1997)

One of the key exceptions to this general rule applies to CGT assets held on as trading stock. Therefore, where the exception applies, a gain or loss made on trading stock is taxed to the fund on revenue account, under the ordinary rules that apply to taxpayers generally, rather than under the CGT rules.

During the recent economic downturn, the ATO identified that many funds, for the first time, sought to treat some of their shares as trading stock so that the exception in S.295-85(4) would apply to ensure that any losses related to those shares were immediately tax deductible against any non-CGT income of the fund (e.g. dividends, rent, etc). Many funds sought to apply this practice even though the CGT rules were used in prior years where a gain was made in order to benefit from the general CGT discount in Division 115 of the ITAA 1997.

TAX WARNING – Trading Stock exception abolished

As part of the May 2011 Federal Budget, the government announced its intention to abolish the trading stock exception to the general rule that CGT is the primary code for taxing certain assets held by complying funds, generally with effect from 10 May 2011. Assets held as trading stock before this date would continue to be treated as trading stock of a fund (and, therefore, taxed on revenue account rather than under the CGT rules)

Following the above the Government recently amended the tax legislation to effectively remove access to the trade stock exception in S.295-85(4) to the general rule that CGT is the primary taxing code, for certain assets (e.g. shares, units in a unit trust and land -refer below) acquired by complying super SMSF’s after 7.30pm on 10 May 2011.

This basically means that gains and losses on affected assets (refer below) acquired by complying SMSF’s after 10 May 2011 will only be dealt with under the CGT rules rather than on revenue account.

In effect, the recent amendments achieve the above result by modifying the definition of ‘trading stock’ contained in S70-10 of the ITAA 1997 to exclude the following assets owned by e complying superannuation fund:

  • A share (or a non-share equity interest) in a company or a share in a foreign hybrid company;
  • A unit in a unit trust
  • Land (including an interest in land); or
  • A right or option to acquire or dispose of the above assets.
By |October 26th, 2012|Self Managed Super Fund News|Comments Off on Latest Guide to Holding Insurance in an SMSF – Tax and other considerations

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