On Thursday 24.11.2016, the ATO released Draft Law Companion Guideline LCG 2016/D8 dealing with Superannuation reform: transfer balance cap and transition-to-retirement (TTR) reforms: transitional CGT relief for superannuation funds.
The Draft Guideline provides guidance on the transitional CGT relief for superannuation funds where assets supporting superannuation income streams are reallocated or reapportioned to accumulation phase interests before 1 July 2017. Some of the detail appears below in extracts from the draft LCG.
Legislative references are to the Treasury Laws Amendment (Fair and Sustainable Superannuation) Bill 2016 (the Bill).
[LTN 229, 25/11/16]
Table of Contents – LCG 2016/D8
| What this draft Guideline is about | 1 |
| Context of the transitional CGT relief for funds | 3 |
| Object of the CGT relief provisions | 9 |
| Making a valid choice and keeping records | 13 |
| Which assets does CGT relief apply to? | 18 |
| Fund uses the segregated method | 19 |
| Certain SMSFs and small-APRA funds may not be segregated | 25 |
| Fund starts using the proportionate method | 28 |
|
Example |
33 |
| Fund continues using the proportionate method | 38 |
| Application of the general anti-avoidance provisions | 41 |
| Effect of the deemed sale and repurchase | 50 |
| Effect of deeming on the CGT discount period | 57 |
| Deeming cannot be ‘unwound’ | 58 |
| Effect of resetting an asset’s cost base to its market value | 60 |
| Deemed sale and repurchase only relevant for CGT purposes | 64 |
| Options available for a fund when considering CGT relief | 66 |
| Asset stops being a segregated current pension asset | 68 |
|
Option one: fund chooses to apply CGT relief |
69 |
|
Option two: fund chooses not to apply CGT relief |
76 |
| Fund continues using the proportionate method | 80 |
|
Option one: fund chooses to apply CGT relief, but chooses not to defer any capital gain |
81 |
|
Option two: fund chooses to apply CGT relief, and chooses to defer a capital gain |
86 |
| Calculating the deferred capital gain | 91 |
| Recognising the deferred capital gain | 98 |
|
Option three: fund chooses not to apply CGT relief |
103 |
Context of the transitional CGT relief for funds
- To prepare for the transfer balance cap reforms commencing on 1 July 2017, individuals may need to reduce amounts currently supporting superannuation income streams to comply with the new requirements. They might do this by withdrawing amounts from the superannuation environment (that is, by partially or fully commuting their superannuation interests)[1], or by transferring value from the retirement phase to the accumulation phase. Action may also be required because a transition-to-retirement income stream (TRIS) will not be a superannuation income stream in retirement phase from 1 July 2017.[2] Hence, a fund will lose the exemption for assets supporting TRISs from this time.
- Action members take in anticipation of the reforms could result in the capital value of a superannuation income stream interest being reduced. Consequently, superannuation funds using the segregated method may need to reallocate CGT assets they hold from their segregated current pension asset pool.[3] Alternatively, the proportion used to calculate the exempt income of funds using the proportionate method will be adjusted.
- The CGT relief provisions preserve the income tax exemption for capital gains accrued, but not yet realised, by a complying superannuation fund on CGT assets held throughout the pre-commencement period (see below). Relief is provided because a member reduces the value of their superannuation income stream before 1 July 2017, to comply with the transfer balance cap or TRIS reforms commencing. The effect of the exempt current pension income provisions is preserved for the entire value of superannuation income stream interests, until:
(i) immediately before the time an asset ceased being a segregated current pension asset during the pre-commencement period, or
(ii) 30 June 2017, where the proportionate method is used.
- The relevant law will be contained in sections 294-100 to 294-120 of the Income Tax (Transitional Provisions) Act 1997 (ITTPA 1997) (the CGT relief provisions). The relief is not available for a life insurance company because comparable relief is already available under Division 320 of the ITAA 1997.
- The relief only applies to certain CGT assets held by a fund throughout the ‘pre-commencement period’. The pre-commencement period is the period starting on the start of the day the Bill implementing the transfer balance cap and TRIS changes was tabled in the House of Representatives[4], to just before 1 July 2017.
- The CGT relief provisions do not need to apply to capital gains realised on the actual disposal, during the pre-commencement period, of CGT assets used to support superannuation income streams.[5] For example, such assets might be realised to support a partial commutation of a superannuation income stream benefit. The realised assets may or may not support value transfers because of the reforms commencing. Relief is not required in this case because gains on such assets would already be exempt to the extent that current exemption rules apply.[6]
Object of the CGT relief provisions
- The object of the CGT relief provisions is to provide temporary relief from certain capital gains that might arise as a result of individuals complying with the transfer balance cap or TRIS reforms commencing.[7] The use of the term ‘as a result of’ in the object clause indicates that there must be a connection between the actions an individual took to comply with the reforms, and any capital gain arising on assets used to support the relevant superannuation income stream.
- When interpreting the CGT relief provisions, an interpretation that best achieves this object is to be preferred.[8] In a self-assessment environment, this means that the onus is on a fund’s trustee to ensure that any of the following choices it makes is consistent with this object:
(i) the choice to reset the cost base of a CGT asset to its market value, when the asset ceases being a segregated current pension asset during the pre-commencement period, but is held by the fund throughout that period[9]
(ii) the choice to reset the cost base for an unsegregated CGT asset to its market value on 30 June 2017, where the fund holds the asset throughout the pre-commencement period[10], and
(iii) the choice to defer recognising a capital gain that arises once the cost base is reset under (ii) above.[11]
- The mechanism used to reset the cost base of a CGT asset to its market value is to deem a sale, followed by an immediate repurchase of the asset. The deeming only applies for the purposes of the CGT provisions in Parts 3-1 and 3-3 of the ITAA 1997 (the CGT regime). This leads to a capital gain or loss arising at the time of the deemed sale. That gain or loss is entirely disregarded for segregated current pension assets. Capital gains are partly disregarded for unsegregated assets under the proportionate method, and may be deferred. Capital losses on unsegregated assets are recognised in accordance with current rules.[12]
- It is reasonably likely that choices made by a fund’s trustee to maximise relief under the provisions are related to the transfer balance cap or TRIS reforms commencing, provided member transfers are made at arm’s length by a fund’s trustee.[13] To establish that CGT relief is exercised consistent with the object, the fund’s trustee may wish to revise the information they have available.