If a member is already in either of these income streams, right now they can sell any underlying assets that support those income streams and do so tax free, simply because the assets supporting pensions are currently within a tax-free environment. Sounds simple right? Sell the asset now and avoid any potential capital gains tax (CGT) concerns. Of course, things are never that simple.

Certainly, from a market stability viewpoint, I don’t think anyone wants to see a sudden rush on the market leading up to 30 June where all of a sudden all super trustees are looking to sell their existing assets just to avoid CGT concerns. Putting aside the market stability concerns that could potentially trigger, selling just because of the existing tax-free status is not only wrong, but could impact a client’s retirement plans. The first question to always ask should be about whether you believe that the assets still have the potential to service your client’s retirement needs, whether through capital growth or income return.

Conscious of the impact on investment markets, as part of the changes the government also provided trustees the potential to apply CGT relief in certain circumstances. The practical effect of this relief is to apply a deemed sale and repurchase of an eligible asset via nomination, without the need to take the asset to market and physically sell it. Time out of the market, transaction costs and buy/sell spreads are all avoided while the cost base of the asset is reset to its current market value, meaning the capital gains to date have been realised, tax free.

While the concept and outcome of the relief is certainly good news, practical steps need to be taken no later than 30 June 2017 to ensure the relief measure can be applied.

But how much needs to moved and how can it calculated by 30 June?  And perhaps more importantly, how is it even possible to do this where the market value of the assets, and the excessive amounts, [won’t be available] until after markets close on 30 June?

SMSFs are in the box seat when it comes to reacting to legislative change and the opportunities it can present. The CGT relief measures are available to all super funds, however the way SMSFs are administrated allows them to make changes to their asset pool more quickly. The benefits of any change will then flow on straight to the respective member’s interests in the fund.

It’s critically important that members of SMSFs, in their capacity as trustees of their fund, make the required decisions to comply with the new rules by 30 June 2017. A straightforward way to demonstrate this intention is via an appropriately documented trustee resolution, stating the way the member wants their pension restructured by the 30 June deadline.

To help with this process, the ATO recently released Practical Compliance Guideline (PCG 2017/5). This guidance provides SMSF trustees with acceptable, practical steps they can take to allow the SMSF to apply any available CGT relief to the assets within the fund.

While there may be other ways to apply the relief which are equally acceptable, PCG 2017/5 effectively provides SMSF trustees with what is commonly referred to a safe harbour steps. These steps, if followed, provide at least some degree of assurance that the ATO would not expect to take compliance action against the fund in relation to their application of the relief.

Because SMSFs are driven through their administration, when the administrators prepare the SMSFs’ accounts for the 30 June year end, which they can only do when they have all the assets valuations as at 30 June, they can then adjust the accounts to reflect the trustee resolution. As an example, it could mean the accounts at 30 June reflect a new pension balance at a maximum of $1.6 million, with any excess reflected as an accumulation account. A TRIS would still be reflected as a TRIS (assuming it is to continue), but will be taxed differently from 1 July 2017.

SMSF trustees will need to consider how an SMSF is administered, as the CGT relief measures apply slightly differently depending if the SMSF uses the segregated or proportionate (unsegregated) method. Broadly, segregation occurs when certain assets have to physically allocate to a specific pension interest in the fund, whereas under the proportionate method, all assets of the SMSF are pooled together, with a percentage of each asset being attributed to all member interest in the fund.

The choice of using a segregated or proportionate approach is one that the client’s SMSF would already have made if they are running pensions. The easiest way to know is to look to the last tax return for the fund, as there is a box to tick depending on the method applied. Also, it’s worth asking the administrator if an actuarial certificate was required to work out the tax-free status within the fund for pension accounts. If there is one, it means you are using the proportionate approach. If not, it means it’s segregated.  

Based on an additional new measure, many SMSFs will lose the ability to segregate assets for tax purposes where members have large balances in superannuation.

There are a number of additional practical impacts to be aware of when reviewing member benefits within an SMSF. While an SMSF which only has pension interests may have been segregated for tax purposes at the beginning of the year, contributions to the fund during the year may change this outcome. As always, it’s very important to have a full understanding of all transitions made throughout the year to ensure it doesn’t adversely affect the application of any relief.

CGT relief for eligible assets applies on an asset by asset basis, down to the individual parcel level in the case of listed securities on managed funds. The relief is only available where an irrevocable election has been made by the time the SMSF is due to lodge its income tax return for the 2016-17 financial year, in a form yet to be determined.

There are certainly a number of contributing factors SMSF advisers need to consider, with many issues unique to each SMSF you advise. While some aspects don’t need to be addressed by 30 June, many do, so there’s little time to waste. Work with your clients to make the appropriate elections in time, and the associated paperwork will naturally follow.

Bryan Ashenden is head of financial literacy and advocacy at BT Financial Group