TAX TIP – How CGT applies to assets affected by the NALI provisions
As discussed above, where an asset has been impacted by the NALI provisions (e.g., the asset was acquired at a discount or the purchase was funded by an interest-free LRBA), any net capital gain will be taxed as part of the fund’s non-arm’s length component at the highest marginal rate (i.e., 45% in the 2020 income year).
Further, if the superannuation fund is paying a ‘retirement phase pension’ to one or more members of the fund, the following applies when calculating the fund’s net capital gain:
- Where the superannuation fund uses the ‘segregated method’ to calculate its pension exemption (i.e., specific assets of the fund are set aside to fund one or more retirement phase pensions), any capital gain derived on a pension asset affected by the NALI provisions will not qualify for the CGT exemption in S.118-320.
- Where the superannuation fund uses the ‘proportionate method’ to calculate its pension exemption (i.e., the pension exemption is calculated based on the proportion of fund assets that support retirement phase pensions), any net capital gain derived on a pension asset affected by the NALI provisions cannot be proportionally reduced under S.295-390.
Other than these modifications, the CGT rules otherwise apply in their ordinary fashion with regards to an asset affected by the NALI provisions. This means, where otherwise eligible, the 33.33% CGT general discount will apply to reduce the capital gain.
Further, the market value substitution rule in S.112-20 may apply in respect of an asset that is acquired by a superannuation fund under a scheme that is subject to the NALI provisions. For example, where real property is acquired by a superannuation fund for less than market value as part of a scheme where the parties were not dealing at arm’s length, when the property is ultimately disposed of, the resulting capital gain will be NALI. However, in calculating the capital gain, the market value substitution rule may apply such that any capital gain on the disposal of the asset is nonetheless reduced, as a result of the CGT asset’s cost base being increased to its market value at the time of acquisition.
Further to the NALI consequences of acquiring an asset for less than its market value, fund trustees must also be mindful of complying with the superannuation legislation. In particular, S.66 of the SIS Act specifically prohibits fund trustees from acquiring assets from related parties, unless an exception applies. Two such exceptions are contained in S.66(2), which provides that fund trustees can acquire business real property and listed securities from related parties at market value.
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