SMSFs, CGT and segregation

Summary: SMSFs with members in pension mode and the segregation method, shedding light on tax selling for shares, and the work test and non-concessional contributions.

Key take-out: A super fund is automatically classed as using the segregation method when all its members are in pension mode. With regards to claiming the CGT concession, I can see no benefit for an SMSF to choose the actuarial method rather than using the segregation method.

Question. You recently wrote with regards to claiming the Capital Gains Tax concession, when someone has a superannuation pension balance of more than $1.6 million, that you can “select the investments being transferred back to accumulation phase for claiming the CGT concession. As result of the fund being totally in pension phase, it could not use the proportional or actuarial method”.

Is this correct, as I was under the impression that the unsegregated method could be used by SMSFs whose members are in pension mode? This is an important point to clarify as I imagine that it will affect many SMSFs.

Answer. The ATO has stated that, based on its interpretation of the relevant legislation, a super fund is automatically classed as using the segregation method when all the fund members are in pension phase.

This interpretation may be backed up by legislation, but it is also a common-sense approach to working out whether the fund is using the segregation method. This is because, for the entire financial year except for the last day, if a fund is using the CGT concession when rolling back the excess over the $1.6 million limit, all the assets of the fund are automatically allocated to the pension accounts.

The other point to make is, regarding the claiming of the CGT concession, I can see no benefit for an SMSF to choose the actuarial method rather than using the segregation method.

When the actuarial method is used, and investments are selected to have the cost base reset at the market value at June 30, 2017, a fund with members in accumulation phase has a percentage of the capital gain concession become taxable, thus negating some of the benefit of the CGT concession.

Whereas, if the segregation method is used, all of the unrealised capital gain related to the pension account, with the excess having to be rolled back into an accumulation account, is untaxable.

A condition of claiming the CGT concession is that, in addition to rolling back the excess over the $1.6 million limit back to an accumulation account, an actuarial certificate must be obtained for what is effectively the final day and hours of the 2017 financial year.

Depending on what actuary the SMSF uses, there is a possibility that a small portion of the income earned by the fund for the 2017 year will be classed as taxable.

Some actuaries assign a time for the commutation and roll back to accumulation as being 23:59 on June 30, which results in no percentage of the income earned in the 2017 year being taxable. Other actuaries use a time for the rollback to accumulation as 00:01 on June 30, 2017. In this situation, a percentage of all the income earned by the fund in the 2017 year could therefore be classed as taxable.

Question. My husband and I are over 75 and we both have more than $1.6 million in our SMSF, so some of the pension account balances must go back into the accumulation fund. As I understand, we will not be allowed to separate our assets and they must be aggregated.

We hold shares that are showing both a large loss and large gains, which go back many years. If we choose to reset our value as at July 1, 2017, must ALL our shares be reset or can we be selective as to which are reset? To selectively sell shares which show a profit would incur considerable brokerage fees especially if we want to repurchase them.

Answer. To be eligible to claim the CGT concession the cost base of investments chosen for this concession must reset at no later than June 30, 2017. They cannot be reset at July 1, 2017. Where the proportional method is used all of the investments can be chosen to have their cost reset to market value. Where there is a mixture of capital gains and losses in an SMSF I can see no benefit in doing this.

Under the segregation method and the proportional method, SMSFs can choose the investments that will have their cost reset to market value. The CGT concession will apply to the unrealised gain for those investments.

The value of the investments selected for the CGT concession, which in your case will be shares, is limited to the amount that your pension accounts exceed the $1.6 million limit.

There are a few steps to make so you can get the maximum benefit from the CGT concession. First, calculate how much your pension accounts exceed the $1.6 million limit. Then, choose those shares that your fund owned from November 9, 2016 until June 30, 2017 whose total value does not exceed the excess over the $1.6 million, and have the highest unrealised capital gains too.

Some shares may have been sold since June 30, 2017 and resulted in large taxable capital gains. Unless shares with large capital losses can be sold to soak up these capital gains, they should be selected for the CGT concession.

Question. I am single, own my own home, and rolled $800,000 into an Income Stream account during the 2017 year that pays me a fortnightly amount that is sufficient to fund my lifestyle. Outside of super I have a share portfolio that's currently valued at about $1.1 million, which obviously fluctuates with the market. My portfolio has a capital loss of $157,000 due to the GFC.

I may be returning to work this financial year. Nothing is set in concrete yet, but I know I will be paid in wages. I still have an accumulation fund and will be receiving the 9.5 per cent superannuation guarantee contributions on my wages.

Can I use the bring-forward rule and make a super contribution of $300,000 during the 2018 year? How much can I contribute as a tax-deductible personal super contribution, and what are the consequences if I go back to work in relation to my fortnightly payments from my income stream?

Answer. Your ability to use the bring-forward rule in relation to non-concessional contributions will depend on your age. If you are turning 65 during the 2018 year you could make a non-concessional contribution of up to $300,000 as a result of you meeting the work test during the 2018 year. If you are 66 or older, you will be limited to making a $100,000 non-concessional contribution.

You can make a personal tax-deductible concessional contribution up to an amount that, after taking into account the total of SGC contributions by your employer during the 2018 year, will result in your total concessional super contributions for the 2018 financial year not exceeding $25,000.

There is only one adverse consequence that I can think of – that's if you're returning to work and receiving an account-based pension from a superannuation fund. This will be if you are under 60 and your account-based pension is primarily made up of taxable superannuation.

By receiving extra taxable income in the form of wages during the 2018 year, this could result in you paying extra tax on the account-based pension after taking into account the 15 per cent superannuation tax offset.