Transitional CGT relief – overview of the transitional CGT measures

Different rules apply depending on what method the SMSF trustees have been using to calculate the earnings exemption (exempt current pension income); being either the segregated or pooled approach.

Keep in mind that the general tax rules will not allow a fund using the segregated asset approach to make use of a “tax” loss, if relevant, as losses on segregated assets are usually disregarded.  However, a fund using the pooled asset approach can utilise tax losses.

These transitional CGT measures are only relevant for the 2017 financial year and will only be relevant for a SMSF where a CGT asset is owned by the fund at 9th November 2016 and is still held at 30 June 2017.

Essentially, the measures will allow the cost base of these assets to be reset to the market value of the asset as at 30 June 2017.  This will ensure that funds holding assets with significant unrealised gains are not unfairly treated.

To make use of the reset provision, the SMSF trustees are required to make an irrevocable written election.

When utilising the above, the following is deemed to have occurred:

  • The fund is deemed to have sold the asset just prior to 30 June 2017; and
  • The fund is deemed to have re-acquired the asset just prior to 30 June 2017

The results of these deemed transactions are:

  • A notional capital gain arises from the deemed transaction.
  • The notional gain that is attributable to any accumulation (non-pension) balance in the fund is included in the taxable income of the fund for the 2017 financial year. This can mean that the fund is liable to pay tax on what is otherwise a non-cash transaction but will result in an increased cost base of the asset.

The outcome from carrying out the above is that the SMSF will have a notional capital gain in the 2017 financial year.  This notional gain would relate to the level of fund assets that are in accumulation phase in the fund.

This notional gain will then need to be included in the SMSFs annual return at some point.