Super tax traps – and how to avoid them

Perpetual Private Insights

Changes to superannuation from 1 July will restrict the amount you can transfer into your pension account and impose a maximum tax of 15 per cent on any income earned from a transition-to-retirement (TtR) pension.

A common response to these changes is to move money from the pension phase to the accumulation phase within the super system. Either as a way to shift excess funds from pension accounts to comply with the new $1.6m limit, or because people no longer see the benefit in having their money in a TtR pension as the fund earnings and capital growth will be taxed.

These strategies have merit as a way to keep funds in super because it remains an effective savings vehicle for retirement. But there’s a catch – and it’s a big one. Any pension assets you bring back into the accumulation phase may be subject to Capital Gains Tax (CGT). 

Think of the accumulation phase as the Trojan Horse and the assets transferred as the soldiers hiding inside. Each soldier may be carrying a CGT risk that you need to neutralise before you bring them inside the gates.


CGT risk on transferred assets

Suppose your super fund bought shares in ABC Company for $5 each a few years ago and these shares have a market value of $10 each on 30 June 2017. When these assets are moved back into the accumulation phase you would have to pay future CGT calculated on the original purchase price of $5.

Realising people may be forced into this situation because of the super changes, the Government has introduced a temporary scheme so fund members are not disadvantaged. It allows the cost base of fund assets to be reset to market value at the time they are transferred back into the accumulation phase.

In the example above, this would mean paying future CGT on any gains from $10 per share rather than from the original purchase price of $5 a share. This could make a BIG difference to your future tax bill.

CGT relief isn’t automatic and doesn’t apply to everyone

CGT relief will not automatically be applied to the transfer of assets – you need to opt-in to the process. Do nothing and you face the prospect of paying tax when the asset is ultimately sold on the unrealised capital gains that existed at 30 June, 2017.

Another important point is that CGT relief isn’t available to everyone as a way to reset cost bases. It only applies if you:

  1. Have more than the $1.6m cap in your pension account and are transferring the excess back into the accumulation phase; or

  2. Have a TtR pension.

Please note that other eligibility criteria applies.

Devil is in the detail

Making the most of CGT relief is a complex process that has to take individual circumstances into account. There’s no ‘one size fits all’ solution.

Decisions should be made on an asset by asset basis. It may make sense to reset the cost base where the market price is greater than the original purchase price, but what should you do when the price has fallen?

We strongly recommend seeking financial advice on your eligibility and guidance on the assets you should nominate for CGT relief. 

SPEAK TO A SUPER EXPERT

A Perpetual adviser can help you cut through the complexity of super and ensure you have the right strategy in place for your personal circumstances

Perpetual Private advice and services are provided by Perpetual Trustee Company Limited (PTCo) ABN 42 000 001 007, AFSL 236643. 

This information has been prepared by PTCo. It contains general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial or other adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.