Putting children in your SMSF

Summary: Understanding the rules around capial gains resets, CGT on inherited properties, and SMSFs and discretionary trusts.

Key take-out: There was no requirement for any SMSF to determine capital gains on shares as of July 1, 2017 due to the introduction of the transfer balance cap system.

Question: What are your thoughts of having our adult children joining our SMSF as members and contributing to the fund? I realise now that as of July 1, 2017 we are going to have to determine all capital gains on all our shares up to July 1 to reset for CGT exemption as we are in the pension phase and they are in the accumulation. No easy task as we have 30 stocks that go back 20 years within our SMSF.

Answer: I am not sure why you believe that you will need to determine all capital gains on your shares up to July 1, 2017 for the CGT exemption, as you are in pension phase and your children will be in accumulation phase if they join your fund.

There was no requirement for any SMSF to determine capital gains on shares as of July 1, 2017 due to the introduction of the transfer balance cap system. The only time that the revaluing of assets was a choice rather than a requirement was when a member had a pension account balance of more than $1.6 million. In this situation the member was required to commute the excess of their pension account over $1.6 million and roll it back into an accumulation account in the fund. That member could choose to claim a CGT exemption on the unrealised profits on assets rolled back to an accumulation account. 

There are two methods for calculating the CGT exemption. The first applied to SMSFs that use the segregation method to account for members in accumulation and pension phase in a fund. The second was for funds that were unsegregated that used an actuary to calculate what portion of the income of the fund relates to accumulation and pension members.

For most SMSFs with members that were required to roll back the excess of their pension account over $1.6 million, the claiming of the CGT exemption occurred on June 30, 2017. The CGT exemption was achieved by revaluing those assets to their market value at June 30, 2017 that the CGT exemption was being claimed for. Therefore, if your children joined your SMSF during the 2018 financial year there is no need to do calculate capital gains.

SMSFs that have a member with a total superannuation balance of more than $1.6 million cannot use the segregation method and must use the actuarial method. If the value of your superannuation accounts does not exceed the $1.6 million you could use the segregation method should your children join the fund as members.

I find it hard to think of any benefits of having your children join your fund that would offset the increased complication and administration costs. You should seek professional advice from a professional that specialises in SMSFs to take you through any possible benefits and the costs of having your children join the fund.

Question: My brother passed away in December 2016. He had two investment properties he bought in 2015, one for $550,000 and the other for $560,000 with interest only loans. The properties were rented out from day one, but they are not positively geared. The plan is to sell both properties at auction with the first being worth $700,000 and the second being worth $760,000. No deduction has been claimed for the special building write off. Is there capital gain tax if we sell one of them and put the gain to the other property?

Answer: When you sell each of the properties capital gains tax will be payable on the difference between the cost of each property and the net selling value. You are not able to put the capital gain from one property onto another.

Because the properties were owned by your deceased brother, and because a deceased estate is treated as an individual for income tax purposes for up to three years during its administration, capital gains tax could be paid by the estate at normal individual marginal tax rates.

To reduce the impact of tax payable on the capital gains it would be best if one of the properties were sold at auction before June 30, 2018, with the other property sold in July 2018 or later. By doing this the capital gain on both properties would be spread over two financial years.

For example, the property that cost $550,000, if it were sold for a net selling value of $700,000, the profit would be $150,000. The purchase date of both properties for the estate will be the date your brother purchased them. This means for this first property, after applying the 50 per cent general discount, $75,000 would be assessed as income to the estate for the 2018 year.

For the second property, if it was sold for a net selling value of $760,000, the profit would be $200,000 with an assessable capital gain for the estate of $100,000. You should seek professional advice before taking action due to the complexities surrounding deceased estates and capital gains tax.

Question: I am currently working with my accountant to submit my SMSF tax return for 2017. I have elected to commute funds in excess of $1.6 million to an accumulation account and claim CGT relief. I understand that the assets being commuted, and on which CGT relief is being claimed, will be assigned the June 30, 2017 values. For ASX quoted stocks this is clearly the end of day prices. For managed funds there is the choice between the quoted buy or sell price, which should be used?

Answer: There is requirement for assets of an SMSF to be shown in the accounts of the fund at their market value. Market value is traditionally the selling value of an asset. This means you should use the sell price for the managed funds.

Question: This question is in relation to the planning considerations for an investment combination of an SMSF and discretionary trust. Under the hypothetical situation where a couple could potentially accumulate $2.6 million by retirement at age 65, would it be better to target $1.6 million for the SMSF and $1 million for the trust?  

Answer: As a general rule it is best if the amount that an individual has in superannuation is maximised. Where a member ends up with an accumulation account of more than the $1.6 million transfer balance cap (TBC), the question is whether to keep the excess over the TBC in the SMSF in an accumulation account, or to commute some or all of the excess and invest it personally or through a family trust.

For a couple or individual that has no other investments outside of superannuation, who are 65 or older, it can make sense to transfer the excess out of the SMSF and invest it personally. This is because a couple can earn approximately $50,000 in income and not pay tax, while in an accumulation account in an SMSF the income would be taxed at 15 per cent.

If it was decided to commute an amount in an accumulation account and invest it outside of superannuation, the benefits of investing this personally or through a family trust will depend on your personal situation, and whether the Labor party wins the next election and introduces their draconian tax on family trusts.