The CGT Relief Guideline allows for segregated assets to be transferred out from the segregated current asset pool and commuted to the Retirement Phase Income Stream (RPIS) at any date between 9 November 2016 and 30 June 2017 to comply with the Transfer Balance Cap (TBC) or the new TRIS reform.
Class only supports desegregation of assets on financial year boundaries. The below issues may arise if the desegregation is processed as at 30 June 2017 but having the pension commutation and CGT relief applied at an earlier date:
- The fund tax liability will be understated
- The value of the member pension account will be overstated
- The value of the member accumulation account will be understated
To prevent these from occurring, follow the workflow below for segregated funds which are applying for CGT relief during the pre-commencement period and will continue with the segregated method through to 30 June 2017.
This is an unlikely scenario, as it is probably in the fund’s best interest to delay cessation date for a fund using the segregated method to 30 June 2017 in order to:
- Maximise the amount of ECPI the fund can claim using the segregated method, or
- Maximise the pension exemption actuarial % should the fund adopt the proportionate method
For funds with segregated assets on 9 November 2016, most likely it will produce the best outcome if the fund switches from segregated to proportionate method (just prior to 1 July 2017), to enable the fund to lock in and disregard any unrealised capital gain across all the segregated assets at cessation time rather than selected segregated assets.
Even if the fund inadvertently received a contribution, there are a number of options to delay the cessation time to a later time (just prior to 1 July 2017):
- The trustee can use the contribution immediately to commence a new pension on the same day and hence continue to maintain its current pension assets pool structure or 100% pension phase.
- The trustee can document this in a minute or resolution so the contribution amount is segregated to support accumulation interest and the other relevant CGT assets are segregated current pension assets.
If there is no evidence of a decision to segregate, the assets may have ceased to be segregated current pension assets when the fund stopped being "fully in pension phase", the cessation time is triggered on the contribution date and CGT relief may be available on that date.
However, triggering a cessation time before 30 June 2017 does not necessarily force the members to roll back their pension to be under $1.6m TBC on the same date. It is possible to delay the commutation to a later time (just prior to 1 July 2017).
- Update the fund policy for FY 2017. For funds that are fully in pension phase, enter 100% in pension exempt% (Actuarial); for other segregated funds, tick yes to ‘Assets Segregated for Pensions’ and have the asset pool structure set up accordingly for FY 2017
- Run a period update to one day before the cessation date to confirm the estimated pension balance
- Commute the excess pension accounts on the cessation date
- Process the CGT relief event on the cessation date. The notional capital gains will be disregarded
- Determine the total investment income for the FY 2017 and the income received from the segregated non-current pension assets from the cessation date to 30 June 2017. Investment Income Summary report with Group by ‘Asset Pool’ should provide this information
- The ECPI% can then be approximated by applying the below formula:
- Update the fund policy with the ECPI% calculated above
- Run the final period update to 30 June 2017
- In the final period update, use ‘Allocate Benefits to Members’ screen to adjust the member’s pension entitlement and accumulation entitlement to reflect the amount of earnings or loss derived from the cessation date and 30 June 2017
- Check the reasonableness of the fund expense apportionment, make an adjustment if necessary
- Run tax finalisation and produce 2017 SMSF Annual Return
- Make sure the Annual Return (Section A - Q 10) states the fund uses segregated method to calculate ECPI
A single member SMSF is in full retirement phase, with a pension balance of $2m. The member chooses to commute $1m back to accumulation on 1 June 2017 and use the segregated method to take up CGT relief. The $1m balance is supported by a property with a cost base of $600K and market value of $1m. The notional deferred capital gains $400K after discounts will be completely disregarded as the fund was in 100% pension phase. The fund receives $1,000 rental income for the month of June on 15 June 2017, that income cannot be ECPI because the fund is no longer in 100% pension phase.
- Fund policy will have 100% pension exempt % (Actuarial) to begin with for the period 1 July 2016 to 30 June 2017.
- Run the period update to 31 May 2017 then commute $1m from the member's existing ABP on 1 June 2017 to comply with $1.6 million transfer balance.
- Process CGT relief on 1 June 2017 while the fund was still in 100% pension.
- Since the fund has total investment income of $100,000 for FY 2017, the revised ECPI can then be approximated by the following: ($100,000 - $1,000) / $100,000 = 99.00%
- Update fund policy with 99.00% pension exemption % and run the period update to 30 June 2017.
- Use 'Allocate Benefits to Members' screen to decrease the member's pension entitlement by the gross investment income amount, i.e. $1000 and increase the member's accumulation entitlement by the investment income amount, $1000. Make sure $150 tax is allocated against the member's accumulation interest.
- Check the reasonableness of the fund expense apportionment, make an adjustment to the allocation if necessary.
- Make sure question 10 of SMSF Annual Return Section A states the fund uses segregated method for 2017 to calculate ECPI.
Given the fund has over $2m in total superannuation balance, for 2017/18 FY, it can no longer use the segregated method to calculate ECPI, it must obtain an actuarial certificate to determine ECPI.