CGT on transferring assets between SMSFs, or from one SMSF to another super fund?
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.
Summary of Practical Considerations and Recommendations
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:
- Is the transfer a result of a relationship breakdown (marriage or defacto)?
- If so, then there are exemptions available if the conditions summarised in this article apply.
- Does the SMSF use the segregated approach to funding any pensions?
- If the SMSF uses the segregated approach (explained below) to funding pensions, then CGT will apply on any gains on the transfer of assets to another super fund. So an alternative for an SMSF which uses the segregated approach is to consider disposing of the asset while in pension phase, and then, later, transferring the proceeds of sale to another super fund without any CGT implications.
- What if it is impractical to sell the asset?
- If the SMSF uses the segregated approach, but it is or is likely to be impractical to sell the asset before transfer, then the SMSF can consider the unsegregated approach discussed below (but it needs to consider this at the outset when setting up the pension).1
- Does the SMSF use the unsegregated approach to funding any pensions?
- If the SMSF uses the unsegregated approach, then the SMSF can exempt a proportion of the gain made on the transfer of assets to another super fund. The SMSF should also ensure that any assets transferred to another super fund are transferred as soon as the SMSF decides to transfer assets in order to maximise any reduction in CGT available under the unsegregated approach.
- Compliance costs — Segregated v Unsegregated
- The SMSF must also consider whether the compliance costs of segregating assets relating to pension accounts outweighs the compliance costs of obtaining an actuary's certificate each financial year.
What assets are typically transferred between SMSFs?
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.
What is the general tax position for a transfer of assets between SMSFs?
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.
Are there exemptions available where there is a marriage or de facto relationship breakdown?
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:
- If assets subject to a "payment split" as defined in the Family Law Act 1975 (Family Law Act) are transferred from a small superannuation fund (which includes an SMSF) to another super fund for the benefit of a spouse who is not a member of the small superannuation fund;
- If there is a court order, agreement or award under the Family Law Act for the breakdown of a marriage or de facto relationship and the 2 relevant people have an interest in a small superannuation fund (which includes an SMSF) and the small superannuation fund transfers an asset from the super fund to another super fund for the benefit of one of those people; or
- a super fund transfers assets to a spouse or former spouse as a result of a court order or agreement under the Family Law Act.
These exemptions require that the parties be separated and that there is no reasonable likelihood of cohabitation being resumed.
Will an exemption be available if the SMSF is paying a pension?
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:
- segregated approach; and
- unsegregated approach.
What is the segregated approach?
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.
What are the CGT implications on a transfer under the segregated approach?
The CGT consequences under the segregated approach are:
- Despite the exemption above, the segregated approach will not allow for the transfer of assets to another super fund without CGT applying to any gains the SMSF makes on the transfer. This is because the pension account is deemed to have ceased before transfer.
- CGT will apply to any gains on the transfer regardless of whether a pension account is established in the super fund in which the assets are transferred to.
- Any previous losses of the SMSF that transfers the asset may offset any capital gain in that SMSF.
What is the unsegregated approach?
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.
What are the CGT implications on a transfer under the unsegregated approach?
The CGT consequences on a transfer under the unsegregated approach are:
- Capital gains made on the transfer of assets to another super fund will be reduced by an amount calculated using the formula described above.
- The proportion of the reduction will depend on the amount of pension liabilities the SMSF has compared to its other superannuation liabilities, as well as how quickly the SMSF transfers its assets once the SMSF decides to transfer assets to another super fund.
- This can therefore provide a better outcome than the segregated approach from a CGT perspective in many circumstances. For example, if assets are transferred as soon as an SMSF decides to transfer the assets to another super fund and if the SMSF's only assets relate to pension payments, then the CGT liability on any gains can be reduced by close to 100%.
More information from Maddocks
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.