Question: I just wanted to confirm the report on 27 April 2017 by Graeme Colley about the CGT base reset values for unsegregated funds. Our SMSF (my wife and myself) has over $3.2 million in shares and cash. Can we reset all values for CGT as at 30 June 2017 for all shares that are in a profit situation, and leave all values at original cost on loss making shares? I.e. no reset base value for CGT on these shares. My accountant seems to think we have to reset all share values on 30 June 2017.

Do we have to reset or not? If we can, what do we need to do to reset these values? Do we have to notify the ATO of the shares reset value and do we have to do it before lodgement of the 2016/2017 tax return. How do we go about doing this?

Answer (by Graeme Colley): It is not compulsory to have the cost base of any of the fund’s investments reset. The trustees have absolute choice on which assets to have the cost base reset.

Whether all of the investments of the fund can have their CGT cost base reset on any assets depends on whether the fund has its exempt pension income calculated on a segregated or proportional (unsegregated) basis:

Segregated Funds

As for the CGT cost base reset, it would also be worthwhile for the trustees to have a minute signed prior to 30 June 2017, which recognises that the value of some fund investments may need to have their CGT cost base reset for those assets being transferred from pension to accumulation phases. However, this cannot be done until the exact value of the investments are known, usually, as at 30 June 2017. When the accounts for the fund are being prepared it may be a good time to select the investments which will require the CGT cost base to be reset. Technically, the fund has up to the time the fund lodges its tax return to elect to reset the CGT cost base of the relevant investments.

Basically, for a segregated fund, it is possible to reset the CGT cost base of the fund’s assets if:

• The asset has been owned by the fund during the period 9 November 2016 until 30 June 2017
• The cost base can only be reset on those assets which are being transferred out of pension phase to either accumulation phase or for pensions that are transition to retirement pensions
• The cost base can be reset on the value of the assets on any date between 9 November 2016 and 30 June 2017
• Resetting of the cost base on the relevant asset is optional
• An election to reset the cost base is irrevocable

If the fund is an unsegregated fund, it would also be worthwhile for the trustees to have a minute signed prior to 30 June 2017, which recognises that the value of some fund investments may need to have their CGT cost base reset. This is not essential.

Unsegregated Funds

Just like funds that use the segregated method, the reset cannot be done until the exact value of the investments are known for a fund that uses the unsegregated method which is also called the proportional method. However, for a fund that uses the unsegregated or proportionate method to work out its tax payable, it is possible to reset the CGT cost base on any CGT asset of the fund.

Basically, for an unsegregated fund it is possible to reset the CGT cost base of the fund’s assets if:

• The asset has been owned by the fund during the period 9 November 2016 until 30 June 2017
• The cost base can be reset on any asset held by the fund during the period 9 November 2016 until 30 June 2017
• The cost base must be reset on the value of the asset as at 30 June 2017
• Resetting of the cost base on the relevant asset is optional
• An election to reset the cost base is irrevocable

To reset the values, it will be necessary to obtain an unrealised capital gains tax report on the fund as at 30 June 2017 in the case of an unsegregated fund, or the value of the particular investment at the time the trustees wish to reset the cost base in the case of a segregated fund. Once the investments that will have their CGT cost base reset have been chosen by the trustee, the accounts for the 2016/17 financial year will be adjusted to reflect the adjusted cost base. The income tax return will include an election from the trustee concerning the investment that has its cost base reset. The election is irrevocable and is required to be lodged with the fund’s 2016/17 income tax return.

Question: Graeme Colley answered a question regarding super new rules relating to the $1.6m balance today. As part of the question it appeared the person was going to retain the highest yielding assets in their pension account and the balance to be commuted to the accumulation account.

I was under the impression that segregation of assets like this was not allowed.

Can you please clarify?

If it is possible, then most people would put their lowest yielding investments, say cash, into their accumulation account and leave their high-yielding shares, say Telstra etc., in the pension account. This naturally would have the effect of limiting the 15% tax to the lowest earning assets.

Answer (by Graeme Colley): From 1 July 2017, if a member of an SMSF has a total superannuation balance in superannuation (pension and accumulation phases) of more than $1.6 million, then for taxation purposes, the SMSF is required to use the unsegregated or proportional method to determine the fund’s tax payable. The proportional method requires the use of an actuary to determine the proportion of the fund’s income that relates to accumulation phase and the proportion that relates to pension phase. The proportion is based on the average of the members’ balances in accumulation and pension phase throughout the year. This method is used solely to work out the amount of tax payable and therefore the proportion of member’s balances determined by the actuary to be in accumulation phase will be multiplied by the fund’s taxable income for the year to work out the amount of tax payable. The proportion of the fund determined by the actuary that relates to pension phase will be tax exempt.

At the member level, each member may have accounts in pension phase and in accumulation phase. It is possible at this level to allocate the fund’s investments between each of these accounts if the trust deed permits, and the members decide to credit the respective investments and any earnings from those investments to the respective accounts in the fund. This will have the impact of increasing the account balances depending on the investments allocated to the member’s accumulation or pension account in the fund.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.