Capital Gains Tax consequences of transferring assets between SMSFs, or from one SMSF to another super fund, are complex and require careful consideration to achieve the most effective tax outcome.
Exemptions on transfers between SMSF's may be available where there is a relationship breakdown.
From there though, the focus for transfers from an SMSF to another super fund is about reducing the liability, rather than being entirely exempt. Capital gains tax exemptions relating to assets held for members in the pension phase don't provide a blanket CGT exemption on transfers from an SMSF to another super fund.
In this article we discuss these issues.Andrew Wright
It is always important to obtain advice before transferring assets from an SMSF to another super fund. Each SMSF has its own specific circumstances which can affect its CGT liability.
When deciding to transfer assets from an SMSF to another super fund, one must consider:
Assets which may be subject to CGT are very broad as a CGT asset is defined as any kind of property or a legal or equitable right that is not property.2
Some examples of CGT assets held in an SMSF which may be transferred include land and buildings such as residential or business property, or shares held in a company.
For the purposes of the ITAA97, transferring an asset between SMSF's will be treated as either a disposal of a CGT asset or a transfer of a CGT asset to a trust.
As such, CGT will apply on the transfer unless an exemption applies. Generally speaking, the amount of the capital gain is based on the market value of the asset transferred less the original purchase price of the asset and certain incidental costs.
The amount of the capital gain calculated will be taxed in the SMSF at a rate of 15%. However, if the SMSF held the asset for a period of at least 12 months, then any capital gain is discounted and taxed at an effective rate of 10%.
Any capital losses on the transfer can be used to offset future capital gains, but only in the current SMSF and importantly, not the super fund to which the assets are transferred. In many circumstances, this means neither fund can make use of capital losses.
The ITAA97 contains exemptions relating to the transfer of assets from an SMSF in certain circumstances if a marriage or de facto relationship breaks down. Generally speaking, the exemption is available in each of the following circumstances:
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These exemptions require that the parties be separated and that there is no reasonable likelihood of cohabitation being resumed.
The ITAA97 may exempt either all, or a proportion of, the ordinary and statutory income of a super fund in certain circumstances if the super fund is paying a pension.3 This does not extend to entirely exempt CGT liabilities on a transfer ? so what matters is how the fund sets up its pension(s).
An SMSF may establish a pension account when members become eligible to receive their super. A common pension account to establish is an account-based pension in which members will receive pension payments each year. The Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations) requires the pension to be paid at least annually and prescribes a minimum amount that must be paid each year. Provided members are above the age of 60, the receipt of pension payments are tax free.
There are two methods in which all or a proportion of the ordinary and statutory income derived by the fund may be exempt which are generally known as the:
An SMSF establishing an account-based pension may adopt the segregated approach to the assets used to fund the pension.
Generally speaking, income earned from assets will be exempt, and capital gains and losses arising from assets will be disregarded, if such assets are used to discharge the pension payments of the SMSF and are segregated from the other assets of the SMSF. 4 These are known as segregated current pension assets.
The exemption does not depend on an actuary's certificate if the pension account is an account-based pension.
The CGT consequences under the segregated approach are:
The unsegregated approach effectively means that assets that fund a pension are not held separately from the other assets of the SMSF. To access tax exemptions on pension assets, the SMSF must have an actuary's certificate each year.
If an SMSF adopts the unsegregated approach to assets, then a proportion of the ordinary and statutory income will be exempt based on this formula5 :
|Average value of current pension liabilities*|
|Average value of superannuation liabilities*|
* Any amounts included under the segregated approach are excluded in this formula.
"Current pension liabilities" are effectively all the pension payments payable by the SMSF to its members.
"Superannuation liabilities" are effectively all pension payments and amounts that will be payable by the SMSF from contributions made to the fund.
The actuary's certificate each financial year must be used to determine the values of these liabilities.
The CGT consequences on a transfer under the unsegregated approach are:
Stay on top of the never ending changes affecting superannuation with the following resources from Thomson Reuters: The Essential SMSF Guide and the Australian Superannuation Handbook. Available in book, ebook and online.
For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Tax and Revenue or General Commercial Teams.
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1 This is because there may be other tax law or super law consequences if the SMSF moves from the segregated approach to the unsegregated approach.
2 See section 108-5 of the Income Tax Assessment Act 1997 (ITAA97)
3 See Subdivision 295-F of the ITAA97.
4 See section 295-385 of the ITAA97.
5 See section 295-385 of the ITAA97.
Andrew is a lawyer in the Maddocks Tax & Revenue team.
Andrew provides advice on:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.