CGT relief – 12-month eligibility / future sale price break even analysis

Monday 12 December 2016

The below is further analysis of the CGT relief measure as discussed in the article Super Reform pension restructuring – the CGT relief

Segregated current pension asset example

Mary will partially commute her SMSF TTR pension to accumulation phase prior to 1 July 2017. The fund currently uses the segregated method for determining its tax exempt income.

XYZ Ltd shares have been held as segregated current pension assets since purchase in 2014 for $5,000. The shares are valued at $6,000 at the time Mary partially commutes her pension. The shares will no longer support her pension entitlement, and so are eligible for the CGT relief.

Mary’s adviser calculates that if the shares are sold within 12 months for less than $8,000 Mary will benefit from resetting the cost base. If the value exceeds $8,000 the cost base reset will result in more CGT than if the cost base is not reset.

Her adviser uses the following formula to calculate the break even future sale price (B/E FSP):

B/E FSP

= 3*NCB – 2*OCB

Where:

 

NCB

= New Cost Base

OCB

= Original Cost Base

 

 

Mary’s B/E FSP

= 3*$6,000 – 2*$5,000

 

= $8,000


If Mary retains the shares until after the new 12-month period has elapsed, she will generally be better off having chosen to reset the cost base.


Proportionate (unsegregated) pension asset example

Max will commute a part of his SMSF account-based pension back to accumulation phase prior to 1 July 2017. The fund currently uses the proportionate method for determining its tax exempt income portion. The fund tax exempt portion is currently 90%.

A parcel of shares in UVW Ltd was purchased by the fund in 2014 for $5,000. The shares are valued at $6,000 at the time Max partially commutes his pension entitlement and are eligible for the CGT relief. The fund’s new tax exempt portion is 40%.

The following formula calculates the break even future sale price (B/E FSP) if a sale of the asset occurs prior to 1 July 2018:

B/E FSP =
NCB*(1-3*New_PPN+2*Old_PPN) – 2*OCB*(Old_PPN – New_PPN) 1 – New_PPN

 

 

Where:

 

OCB

= Original Cost Base

NCB

= New Cost Base

Old_PPN

= Pre-commutation tax exempt proportion

New_PPN

= Post-commutation tax exempt proportion

 

 

Max's B/E FSP =
$6,000*(1-3*40%+2*90%) – 2*$5,000*(90% – 40%) 1 – 40%

=

$7,667


Max’s adviser calculates that if the shares are sold in the 2017/18 income year for less than $7,667 the fund will benefit from resetting the cost base. If the value exceeds $7,667 the cost base reset will result in more CGT than if the cost base is not reset.


Return to the main article, Super Reform pension restructuring – the CGT relief

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