Superannuation funds and their custodians are facing substantial new costs as a result of the superannuation tax changes announced in the last Federal Budget.
Just a week out from the 2017/18 Federal Budget, the Association of Superannuation Funds of Australia (ASFA) has pointed to a series of shortcomings and concerns emanating from the Treasury Laws Amendment (2017 Measures No. 2) Bill 2017.
One of the most important issues raised by ASFA is the transitional rules introduced to provide capital gains tax (CGT) relief, with the organisation warning that the design of the relief for large unsegregated funds “presents significant practical challenges”.
“The new $1.6 million transfer balance cap under Division 294, along with the change to the treatment of transition to retirement income streams (TRISs) where the member has not satisfied a specified condition of release… will have the effect of reducing the Exempt Current Pension Income (ECPI) proportion of large unsegregated superannuation funds’ assets,” it said.
The submission then went on to warn that “the single biggest impediment is that a number of the custodians providing services to superannuation funds, on which funds rely for their broader CGT reporting, have indicated that significant system upgrades to their tax reporting and underlying IT systems will be necessary to accommodate the relief”.
It said the main challenges included the need to:
- Undertake an analysis of all CGT assets at a parcel level, to identify which assets are eligible for the relief and which of these assets should be chosen for the relief. This is not a straightforward exercise due to the differing unrealised CGT profiles, comprising assets in long gain, short gain and loss positions;
- Tag specific deferred gain amounts to assets on a parcel-by-parcel basis, so that when they are disposed the deferred gain is properly brought to account for tax purposes, along with the subsequent actual capital gain or loss based on the reset cost base;
- It said other implementation challenges included
- Whether a custodian is able to isolate the deemed sale and reacquisition such that it only gives rise to the intended CGT consequences (transitional CGT relief) without unintended consequences (such as triggering 45 day holding period rule testing);
- There are likely to be timing difficulties in how CGT cost base adjustments for tax deferred distribution amounts are processed, along with how the ECPI reduction to the deferred gain is determined, as the relevant information will not become available until sometime after 30 June 2017;
- For those superannuation funds using custodians that cannot provide a systematic solution, due to the vast scale of data involved many are understandably reluctant to create a work-around solution which would create significant complexity and risk;
- Custodians would be likely to need to recover the significant one-off costs to develop the functionality, if it were feasible within the short timeframe.
