Last Thursday (24 November) the ATO released Law Companion Guide (LCG) 2016/D8. It is designed to provide some extra insights into how the ATO will apply the CGT relief accompanying the 1 July 2017 changes to superannuation pensions.
The law itself has already been passed and is quite complex – there are some odd cases of people who will miss out despite being obvious candidates for relief and others where they will fall within the rules despite not really being affected by the changes. So like any law, it’s not perfect.
The Explanatory Memorandum that accompanies it is covered in references to Part IVA of the Income Tax Assessment Act 1936 (which deals with schemes to avoid tax). This makes it pretty clear that those who manipulate their circumstances to get access to the CGT relief will be at significant risk of being pursued by the ATO.
To my mind the latest guidance from the ATO actually makes the situation even more confusing because it takes this one step further.
The draft LCG indicates that the ATO will administer the law in such a way as to require that:
“there must be a connection between the actions an individual took to comply with the reforms, and any capital gain arising on assets used to support the relevant superannuation income stream.”
Subsequent paragraphs go even further and put the onus firmly on the trustee to decide that they can take advantage of the relief because the action they take “now” is directly related to a need to restructure for the 1 July 2017 changes.
The craziness here is that action is rarely driven by any one thing, it’s a combination of circumstances. It’s one thing to say that you can’t enter into a scheme that is purely driven to avoid tax (tax avoidance in the normal sense) but it’s quite an extension to say that you only have CGT relief if you needed to take a particular course of action to comply with new laws.
What about someone who has a transition to retirement pension and is currently segregating their assets because they have particular investments they want backing that pension. This is currently a perfectly legitimate and common strategy. They know that next year there will be no tax break on their transition to retirement pension. They don’t actually need to do anything to comply with the new rules, they could just leave everything exactly as it is and accept that next year’s tax outcome won’t be as good as this year’s.
But they might well decide to stop segregating their assets some time before 30 June 2017 because there’s no need to do so in the future (it has no impact) and it’s currently costing them extra in accounting fees. Or maybe they are about to make a contribution and normally they would have segregated that in a new bank account but since it has no ongoing benefit they won’t do so in 2016/17.
The provisions of the new law would give them access to the CGT relief under these circumstances even though they actually don’t have to do anything to “comply” with the new rules.
I expect Part IVA would not normally apply because they clearly haven’t manipulated their circumstances for the purposes of getting a tax benefit. It’s been a natural outcome of actions they have taken for a variety of reasons that make sense.
But what about LCG 2016/D8? Could they argue that their action is in line with Paragraph 9 above? In my view the current wording of the guidance puts that at risk. Those receiving a transition to retirement pension don’t actually have to take any action at all to comply with the new rules.
I really hope this draft is changed to avoid adding even more confusion and complexity. One thing is for sure – the ATO are likely to scrutinise CGT relief claims carefully and it will be important to be across the latest state of play at all times.