For fund members with existing benefits in retirement phase (RP) as at 30 June 2017, the maximum amount allowed to remain in RP at that date, also known as the transfer balance cap, is $1,600,000. Any excess is required to be returned to accumulation phase.
Earnings on fund benefits in RP are exempt from tax, whereas earnings on fund benefits in accumulation are not. Transitional capital gains tax (CGT) relief allows a fund to reset the cost base of the fund’s investment to its market value so that the previous RP tax exemption is protected. Any increase in value whilst supporting a RP benefit remains exempt. This cost base resetting process requires a notional sale and immediate repurchase of the assets held by the fund. This process is on a per asset basis so you will need to carefully choose which assets you notionally sell and buy back.
In electing for CGT relief to apply, a fund also needs to consider if, as at 9 November 2016, it is using the segregated method or the proportionate method to determine which assets support the RP benefit.
A fund in 100% pension mode is using the segregated method. If it remained segregated until 30 June 2017 the fund should sell and repurchase only those assets with unrealised capital gains on that date. The gain is realised but is not taxable. This resets the cost base of the asset to its current market value and ensures only future increases in market value will be taxable.
It is important to note that no CGT relief is required on assets with unrealised losses. Applying relief to a loss would mean the loss is disregarded and lost to the fund forever.
If the fund became unsegregated between 9 November 2016 and 30 June 2017, it can employ the same strategy on the earlier date that it became unsegregated.
A fund with mixed benefits, i.e. RP and accumulation cannot be a segregated fund. However, the fund can still elect to notionally sell and repurchase the fund’s assets as at 30 June 2017. The cost base of each asset is then reset to its current market value as at that date.
All unrealised capital gains and losses to 30 June 2017 are now realised and assessable (to the proportion that they support an accumulation balance) to the fund.
However a further transitional provision allows the fund to defer any taxable capital gains to the date of its future sale. Capital losses are carried forward for future offset against future capital gains.
If your fund has not carefully considered its options regarding the transfer balance cap and transitional CGT relief you may wish to double check these have all been dealt with in the most appropriate manner.