Is your super fund eligible for Capital Gains Tax Relief?

[ how it works under the super changes ]
by Megan Kelly Published

There has been a lot of information for self-funded to retirees to take in following the changes to superannuation. Most of the focus has gone into the $1.6million cap and how it will impact you, but there are also some great opportunities for you to wrap your head around!

Anyone who is in pension phase and impacted by the changes is also likely to be eligible to claim CGT relief.

The way these rules work is complicated, and will differ from person to person depending on your personal situation. The basic concept is that you can elect to increase the cost base of your assets to their market value at 30 June 2017.

For example, if you own shares with an original cost base of $10,000 and they are worth $50,000 at 30 June 2017, then you can elect to use this value as their new cost base. Effectively this will reduce any capital gain in the future. However, this comes with strings attached that we will explain in more detail in our two case studies. The aim of doing this is to reduce the impact of these assets potentially returning from tax-free pension phase to a taxable environment under the new super rules. Something that is very important to anyone who has over $1.6million in pension assets and would have paid no tax at all under the old rules.

However, the key things to note are:

  1. If you have either a transition to retirement pension or a pension account that exceeded $1.6million you are likely to be eligible to claim CGT relief.
  2. The asset must have been owned and supporting a pension at 9 November 2016 and still owned at 30 June 2017.
  3. An election to use the CGT relief must be made before lodging your SMSFs 2017 tax return
  4. This election is irrevocable.
  5. You can also elect to defer any taxable capital gains arising from the election until the year the asset is actually sold.
  6. By making this election it is treated as a sale and repurchase of the asset, therefore the 12 month ownership requirement for the CGT discount will also reset.

But most importantly, if you had a fund that was 100% in pension phase at 9 November 2016 and you want to make a contribution before 30 June 2017, you should seek personal advice or potentially lose your eligibility to claim CGT relief!

Personalised advice before making these decisions is important, as every situation is different and this decision is irrevocable.

HERE ARE TWO CASE STUDIES BREAKING DOWN HOW THE CGT RELIEF WILL WORK ..

CASE STUDY #1: 

Both members already on Transition to Retirement Pensions (Better off using CGT relief)

Marty and Jennifer have all their superannuation within their self-managed super fund. In this fund they own a commercial property which is rented back to their movie production business. They bought this property 10 years ago for $2.4million , but it is now worth $3million.

At 30 June 2017 the financial reports have the fund valued at $3.5 million made up as follows:


Split as follows:


If Marty and Jennifer elected to apply the CGT relief:

Deemed Capital Gain on Property[Market value $3million less $2.4million cost base] $600,000
Less: 1/3 CGT Discount [$200,000]
Net capital gain $400,000
Less: pension exempt income [88.5%] [$354,000]
Net Taxable gain: $46,000
Tax deferred to when the property is sold $6,900
Tax ignored by applying CGT relief $53,100

Fast forward another 10 years to when the property is actually sold. Marty and Jennifer now have $4.2million in their super fund, they both have $1.6million in pension phase and the property is sold for $3.6million

Capital Gain on Property[Sale proceeds $3.6million less deemed cost base of $3million cost base] $600,000
Less: 1/3 CGT Discount [$200,000]
Net capital gain $400,000
Less: pension exempt income [76%] [$304,000]
Net Taxable gain on sale: $96,000
Add: Deferred net capital gain $46,000
Total taxable capital gain $142,000
Tax payable on property sale $21,300

If we took this same scenario but didn’t elect to use the CGT relief what would the tax have been?

Capital Gain on Property[Sale proceeds $3.6million less $2.4million cost base] $1,200,000
Less: 1/3 CGT Discount [$400,000]
Net capital gain $800,000
Less: pension exempt income [76%] [$608,000]
Net Taxable gain on sale: $192,000
Tax payable on property sale $28,800

So in this scenario, Marty and Jennifer have saved $7,500 in tax by utilising the CGT relief option.

CASE STUDY #2: 

Only one member in pension phase (Worse off if in pension)

Marty and Jennifer have all their superannuation within their self-managed super fund. In this fund they own a commercial property which is rented back to their movie production business. They bought this property 10 years ago for $2.4million, but it is now worth $3million.

At 30 June 2017 the financial reports have the fund valued at $3.5 million made up as follows:


Split as follows:

If Marty and Jennifer elected to apply the CGT relief:

Deemed Capital Gain on Property[Market value $3million less $2.4million cost base] $600,000
Less: 1/3 CGT Discount [$200,000]
Net capital gain $400,000
Less: pension exempt income [57%] [$228,000]
Net Taxable gain: $172,000
Tax deferred to when the property is sold $25,800
Tax ignored by applying CGT relief $34,200

  
  
Fast forward another 10 years to when the property is actually sold. Marty and Jennifer now have $4.2million in their super fund, they both have $1.6million in pension phase and the property is sold for $3.6million.
   

Capital Gain on Property[Sale proceeds $3.6million less deemed cost base of $3million cost base] $600,000
Less: 1/3 CGT Discount [$200,000]
Net capital gain $400,000
Less: pension exempt income [76%] [$304,000]
Net Taxable gain on sale: $96,000
Add: Deferred net capital gain $172,000
Total taxable capital gain $268,000
Tax payable on property sale $40,200

  
  

If we took this same scenario but didn’t elect to use the CGT relief what would the tax have been?

  

Capital Gain on Property[Sale proceeds $3.6million less $2.4million cost base] $1,200,000
Less: 1/3 CGT Discount [$400,000]
Net capital gain $800,000
Less: pension exempt income [76%] [$608,000]
Net Taxable gain on sale: $192,000
Tax payable on property sale $28,800

  

So in this scenario, Marty and Jennifer would have been better off not electing to apply the transition CGT relief. This was due to the fact that Jennifer was not in pension phase at 30 June 2017 resulting in a larger deferred gain. The outcome will be different for each client and potentially each of their assets, so it is worth taking the time to get advice before making these CGT elections.

SUMMARY

The CGT relief is a great opportunity for clients that are impacted by the new super rules. However, every situation will be very different and will require careful consideration before making the election.

For personalised tax advice in relation to CGT Relief and your fund, please do not hesitate to contact MEGAN KELLY at m.kelly@businessdepot.com.au or on 07 3193 3020.

General Advice Warning:

Information provided on this website is general in nature and does not constitute financial advice. Every effort has been made to ensure that the information provided is accurate. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult a financial adviser to take into account your particular investment objectives, financial situation and individual needs.

Depot Superannuation Pty Ltd is a corporate authorised representative (No 1240831) of Hunter Green Pty Ltd AFSL 225962.

Megan Kelly
read more by Megan Kelly

Megan’s skills in self-managed super to provide both the accounting and strategic advice solutions for clients. Her many years working with business owners on their SMSFs has meant that she understands the value of including their superannuation in a business owners overall financial plan.

Her passion is to assist client’s in taking control of their future, through supporting them in making decisions in relation to the self-managed fund and their retirement. Megan regularly provides advice in relation to investment structuring, SIS compliance as well as pension and retirement planning.

Megan has also provided specialist support in relation to estate planning, family law disputes and compliance issues. She is a member of the SMSF Association Queensland Community, and a valued member of the network of SMSF specialists.

Megan Kelly is an authorised representative [No. 1240833] of Hunter Green Pty Ltd AFSL 225962. Your Adviser may offer you services through Depot Superannuation Pty Ltd which is a separate business. Although the same Adviser may offer you services under the above businesses, each business is solely and separately responsible for the advice they each provide. In particular, Hunter Green is only responsible for the financial planning services provided by Megan Kelly.

[ Never miss a Tool, Tip, Resource or Event ]

Join the businessDEPOT community and get the latest advice
and insight directly to your inbox.

Tax

Get All Zen With Your Tax

Get In Touch

insights

[ We help businesses and individuals of all shapes and sizes, and provide insight based on our extensive experience. ]

[ About ]

[ businessDEPOT is driven by a team of plain-talking, energetic and proactive people, and we believe in a fresh approach to providing advice and accounting services. ]