CPD QUARTERLY is a very useful outcome when assessing a fund’s tax position when capital gains are realised, it does also mean that capital losses are effectively lost. Such capital losses can neither be applied against capital gains made on other assets of the fund in the income year nor carried forward to future years.
approach and the other unsegregated. During the income year, each sold four parcels of shares, with the following result: • Share 1: $10,000 capital gain • Share 2: $3,000 capital loss
Under an unsegregated approach, however, all capital gains and losses are recognised, with the usual principles applying to their taxation. This means that capital losses are able to be fully utilised in the income year in which they are incurred, with any unused losses able to be carried forward to be offset against realised gains made in future years. Example 3 illustrates the different outcomes when dealing with capital losses.
Example 3 – capital losses and exempt pension income Consider two superannuation funds with the same shareholdings, one using a segregated pension asset
• Share 3: $5,000 capital gain • Share 4: $15,000 capital loss In Fund 1, these shares were segregated current pension assets, meaning that all capital gains and losses are ignored. In Fund 2, an unsegregated approach has been used, with 65 per cent of the fund’s liabilities being pension liabilities. The overall position from the disposal of the shares in Fund 2 is a capital loss of $3,000. This loss is available to carry forward to offset capital gains in
future income years. If $5,000 of capital gains were realised in the following income year, Fund 2 could offset these with the $3,000 carry-forward loss to give a net capital gain of $2,000. Assuming the same proportion of pension liabilities, $1,300 (ie, 65 per cent of $2,000) of this gain would be exempt income.
Summary There can be advantages and disadvantages to either segregating current pension assets or holding assets on an unsegregated basis. Trustees must then weigh these up in light of the particular circumstances of the fund and requirements of the members. Table 1 summarises these advantages and disadvantages, however, trustees and their advisers should note that both approaches can be used concurrently, and altered at any time to suit the changing needs of the fund. Deborah Wixted is Head of Technical Services, Colonial First State.
Table 1 – Advantages and disadvantages of pension asset exemption methods Segregated pension assets Advantages Disadvantages No actuarial certificate required for Need to separately identify account-based pensions pension assets Can segregate 100% of specific assets Will generally require a separate with large accumulated capital gains set of financial accounts Can segregate high income producing All income is segregated and can assets leaving growth assets in the only be used to support pension accumulation phase liabilities Can’t segregate part of an indivisible property Capital losses on segregated assets not available
Unsegregated pension assets Advantages Disadvantages Relatively simple to administer Actuarial certificate required every year, regardless of type of pension Only one set of financial A proportion of all income and capital accounts needed gains taxable A proportion of all income and capital gains tax free Can cater for large indivisible assets Any capital losses fully available
Questions 1. Segregated current pension assets are: a. Only able to support the accountbased, allocated or market linked pension liabilities of a superannuation fund. b. Those held for the sole purpose of enabling a superannuation fund to discharge its current or contingent pension liabilities. c. Those held for the sole purpose of enabling a superannuation fund to discharge its contingent liabilities only. d. The only assets of a fund that can give rise to exempt income, either in whole or in part.
2. Capital losses made on the disposal of unsegregated pension assets during an income year: a. Cannot be used to offset capital gains in the same or a future income year. b. Can be used to offset capital gains only in the same income year. c. Can be used to offset capital gains in the same or a future income year. d. Can be used to offset capital gains only in a future income year. 3. Superannuation fund expenses relating solely to segregated pension assets are:
a. Non-deductible, as they are not incurred in the course of the fund deriving assessable income. b. Fully tax deductible, as the nexus with the derivation of assessable income is not required for superannuation funds. c. Proportionally tax deductible, depending upon the tax-free component of the relevant pension interests. d. Proportionally tax deductible, depending upon the ratio of pension liabilities to superannuation liabilities within the fund.
4. For taxation purposes, a superannuation fund requires an actuarial certificate: a. Whenever a pension is being paid to a member, regardless of the pension type. b. Only if it is paying a defined benefit pension to a member. c. Where the fund is paying an account-based pension supported by unsegregated assets or where it is paying a defined benefit pension. d. Where the fund is paying an account-based pension supported by segregated assets. Continued on p30 financial planning | SEPTEMBER 2011 | 29