CGT on transferring assets between SMSFs, or from one SMSF to another super fund?

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• 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 :

* 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%.