Wrap Platforms and the Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016

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Background

Single line item reporting of wrap platforms in SMSF accounts is a widespread accounting industry practice.  This method of reporting entails the consolidation of all investments held on a wrap platform into a single line item on the Statement of Financial Position.  It further relies on the annual wrap tax statements to report all elements of taxable income and capital gains in the SMSF tax return.  The basis for relying on these wrap reports is that the portfolio manager has a GS007 compliant audit conducted over its internal control structure each year.

A key facet of accounting for an SMSF’s investments in this manner is that the accountant does not keep track of the cost base of the underlying assets held on the wrap platform (instead reliance is placed on the realised capital gains schedule published in the annual wrap tax summary).

 

Issue raised by new legislation

Under the Superannuation (Excess Transfer Balance Tax) Imposition Bill 2016, CGT relief is going to be granted to funds on the basis that they may have to make changes to their pension structure to comply with the new legislation.  The relief will ensure that tax does not apply to unrealised capital gains that have accrued on assets that were used to support superannuation income streams up until the time of the change.

Whether a fund utilises the segregated or proportionate method of calculating the tax attributable to pensioners in the fund, the end result will be that investments with unrealised capital gains will be able to reset their cost bases at, or in some cases before 30 June 2017.  This will result in not only a new cost base for these investments but a deferred capital gains tax liability which will be raised against parcels which relate to assets backing accumulation accounts.  This deferred capital gains tax liability will need to be attached to the corresponding share parcel until such time as the investment is sold.

The issue that this raises for accountants and wrap platform providers is can the details of the cost base reset and deferred CGT elements be communicated and then tracked and reported by the wrap provider?  If this cannot be done, it calls into question the usefulness of the wrap platform as a reporting product.

 

Options moving forward

  1. Wrap systems upgrade to cater for changes to cost base

This is the ideal outcome.  Under this scenario the accountant would prepare the 2017 accounts as normal and the trustees would make changes to their pension structure by 30 June 2017 to bring themselves into line with the new legislation.  The accountant will identify investment parcels which will have their cost base refreshed and calculate and deferred capital gains tax attributable to each parcel.  This information would then be communicated to the wrap provider who add the cost base and capital gains tax adjustments into their reporting system.

 

  1. Wrap provider unable to help which will force a change in method of accounting

If the wrap provider cannot cope with this change, then it will force a change in the way the investments on the wrap platform are accounted for.  The single line item will need to be split apart into all of its individual component investments so that the accountant can track all the cost base and capital gains tax changes.  This will be a costly alternative in comparison to the single line item method of accounting.

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  1. Do nothing

This is not really an option as whilst it is within the law to elect not to apply the CGT relief provisions, it would be doing a disservice to the members of the SMSF.

 

If you have any concerns regarding this or any SMSF matter, please contact the expert team at Aquila Super and we will help.