CGT Reset for Loss Assets
We have been fielding a number of queries regarding CGT reset scenarios and losses when the relief is determined for an unsegregated, or pooled, arrangement. This is a confusing subject as capital losses are not applied in the same way as capital gains.
Let’s consider the following example for an unsegregated fund which already holds a carried forward capital loss at 1/7/16 of $100k. As at 30/6/17 the CGT reset produces a $90k notional gain on assets that have been held for a year. The actuarial certificate shows the fund is 90% tax exempt. The tax on the notional capital gain may be paid in the 2017 return or the tax calculation on the notional capital may be deferred until the assets are sold in some future year.
If the tax payment on the gain is not deferred it is calculated as follows;
Gross Capital Gain $90k
Capital Loss $100k
Assessable Capital Gain Nil (after the $100k capital loss)
Capital Loss Carried Forward $10k
If it is deferred then;
Gross Capital Gain $90k
Discounted Capital Gain $60k (90k x 2/3)
Assessable Portion of Capital Gain $6k ($60k x 10%)
Gross Capital Gain (Deferred) $6k
Capital Loss $100k (assuming loss is still available)
Assessable Capital Gain* Nil
Capital Loss Carried Forward $94k
If the asset in the deferred example was ultimately sold, for a greater or lesser amount than the amount of the reset cost base, the capital gains tax effect would be applied in the usual way.
Essentially, by deferring the notional capital gain, the application of the capital loss becomes more effective. In this example the capital loss was carried forward from a previous financial year but it might also have been created by resetting the cost base of an asset with an unrealised loss.
If a capital loss is created by the resetting of an asset cost base this will increase the amount of assessable capital gain that would otherwise be produced on the ultimate sale of the asset but this may not be an issue if the fund is fully in pension at the time. This consideration is different for a deferred capital gain as, in this scenario, the deferred gain is assessable even if the fund is 100% in pension at the time of sale. An additional potential use might be the resetting of the cost base of frozen assets that may have little chance of recovering their value but may not, apart from the reset mechanism, be able to be disposed of to realise their loss.
If the CGT reset is being applied on a segregated scenario any CGT event is disregarded so carried forward losses are unaffected and resetting the cost base on assets in a loss position is of no effect. Resetting such loss assets may even be a disadvantage in the future if the SMSF benefit becomes taxable in a future death benefit scenario.