Amid the reports of SMSF trustees selling real estate in droves, it may be worthwhile for tax and superannuation professionals to step back, identify clients most likely needing to scale back their pensions, and see the best methods that may be suited to particular client's circumstances.
One issue of concern that keeps being raised time and again is what to do in situations when the fund has one or several large assets and a member needs to commute part of their pension back into accumulation in order to comply with the transfer balance cap. Issues to consider in this case include the following.Denys Smerchanskyi, Tax Specialist and Technical Wrier, Tax & Super Australia
Broadly, an SMSF will not be able to use a segregated method if it has a member receiving retirement phase benefits and the same member has a total superannuation balance exceeding $1.6 million (section 295-387 of the ITAA97). It will be necessary to use the proportionate method in such cases.
CGT relief is another change to the superannuation landscape that needs to be dealt with. Broadly, the CGT relief resets the asset cost base to the market value as at 30 June 2017 or on a date when segregation stops. Note that CGT relief is optional but irrevocable.
If a large asset or several large assets were segregated, then the cost base will be reset at the time when the segregation stops.
If the proportionate method was used, then the approach for a large asset will not be any different to other investments. Generally, the cost base will be reset to the market value on June 30. The reset of the cost base will generate an assessable capital gain based on the actuary's non-exempt percentage. This gain can be deferred until the asset is actually sold.
Naturally, the commutation from pension back into accumulation must be done to an extent needed to comply with the transfer balance cap of $1.6 million. For instance, if a member has a pension, which has an expected balance as at June 30 of $2.2 million, then only a commutation of $700,000 is needed to comply with the transfer balance cap.
The ATO's explanatory memorandum clearly warns that inappropriate access to CGT relief will be subject to general anti-avoidance rules. The draft LCG 2016/D8 issues a similar warning, which states that only schemes that do no more than that which is necessary to comply with the new laws will not be subject to Part IVA determinations. This is contrary to schemes that abuse the CGT relief.
After having sorted the end of a segregated method, if relevant, and made all the CGT relief elections, if chosen, having one large asset or several large assets in an SMSF will not be much different compared to what it used to be before the reforms.
Trustees can expect to continue with their chosen investments and use a proportionate method to determine the exempt portion of the investment income, which may necessarily be lower due to the transfer balance cap.
Source: This article was first published by Tax & Super Australia at http://taxandsupernewsroom.com.au/
You can read earlier ClearLaw articles on a range of SMSF topics .
Andrew is a Partner in the Maddocks Tax & Revenue team.
Andrew provides advice on:
His advice covers both direct and indirect tax considerations.
Prior to joining Maddocks, Andrew was a tax consultant at a Big 4 Chartered Accounting Firm.
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