Tax with Max: Asset resetting and CGT relief

Question: We have a self-managed super fund with one member who is 69 and recently retired with a balance of $1.95 million spread over four tax-free pensions, and one an accumulation account with about $190,000. The second member is 58, not working, has a nil balance but used up the full $540,000 bring forward rule just before the June 30 this year, and will roll over another $300,000 from another super fund when they turn 60.

Does the changes introduced on July 1 allow for all of the first member's non-cash holdings to simply be reset to market value under the relief offered and then, by using an actuary each year, allow the fund to be taxed proportionally across all of the holdings for both members? If so what minutes or trust deed update needs to be done to accomplish this?

Answer: The capital gains tax relief being offered as a result of the introduction of the pension transfer balance cap only relates to the value of assets transferred back to accumulation phase to meet the new $1.6 million limit.

As a part of the legislation introducing the new superannuation system there is a section that specifically relates to general anti-avoidance provisions. In the memorandum explaining the changes the section starts with, “The CGT relief arrangements are only intended to support movements or re‑proportioning of assets and balances necessary to support compliance with the transfer balance cap”.

This being the case you can only reset to market value of assets that are worth up to approximately $160,000. The reason why you can only reset $160,000 is because, after taking into account your accumulation account of $190,000, your excess in pension accounts is only $160,000.

The only time assets that are worth more than the excess over $1.6 million limit can be transferred back to an accumulation account is when they are lumpy assets. These would include such things as property or a large shareholding in a company.

For example, if you had chosen four shareholdings that totalled $150,000, and you had one other shareholding that was worth $30,000, you could commute $180,000 back to accumulation to meet the $1.6 million limit and claim the capital gains tax relief on those five parcels of shares.

To get the benefit of CGT relief there will need to be a letter from member one requesting the trustees, once the balance of their superannuation pension accounts has been established at June 30, 2017 and prior to finalising the super funds accounts, to commute any excess that their pension accounts exceed the $1.6 million limit.

In the case of member one they would need to specify which of the four pension accounts would be wholly or partially commuted to meet the $1.6 million limit. The trustees would also need to prepare a minute acknowledging the member's request, and when the 2017 tax return is being prepared for the super fund an irrevocable application for CGT relief needs to be lodged at the time the return is lodged.

Rather than having to seek an allowance to use an actuary to use the proportional method after June 30, 2017, when a fund has a member with a super balance over $1.6 million, the segregation method cannot be used and a fund must use an actuary to calculate what portion of the fund's earnings relates to accumulation fund members and what proportion relates to pension fund members.

As to whether there needs to be changes made to the trust deed of your SMSF will depend on when it was last updated. If it was updated when the last major changes were introduced in 2007 an update is probably not required, but you should speak to an SMSF professional to ask for further advice in relation to this.

Question: I have seen mentioned in articles that I have read in Eureka Report of a tax-free basket and a three bucket strategy. Is there an ATO ruling about this and can you please explain in detail why this is a good strategy and how those who are likeminded would set it up for their own SMSF?

Answer: Within a superannuation fund the tax-free basket often refers to the value of a member's superannuation that has resulted from non-concessional after-tax contributions. To the best of my knowledge there are no ATO rulings relating to the three bucket strategy.

The three bucket strategy is a simple one based around the $1.6 million pension account limit, and a choice between leaving money in an accumulation account bucket or taking a lump sum payout from superannuation and investing it personally.

The first bucket in this strategy is the $1.6 million pension account where the income earned relating to the pension is not taxed in the super fund. As to how much money stays in the second accumulation account bucket, or how much is taken out of superannuation and invested in the personal bucket, depends on how much taxable income the member is earning before any money is taken out of superannuation.

If the member currently does not have any taxable income, due to all of their retirement assets being in pension phase in an SMSF, on the basis of a 5 per cent earning rate, and an amount of $25,000 that can be earned tax-free by an individual who is 65 or older, they could transfer $500,000 out of the superannuation accumulation bucket into their personal name to invest.

If a member already has taxable income they should only transfer out of superannuation an amount that will bring the taxable income up to the tax-free limit, and leave the balance in their superannuation accumulation the account bucket where the income will be taxed at only 15 per cent.

Question: I am in the position where I have three years until I can access super and am also very close to the $1.6 million balance now. I am attempting to increase the tax-free component before it's too late but don't want to put in too much this year before the rules change as I have already retired.

In the latest SMSF newsletter from the ATO it seemed that if somebody had a super balance of say $1.599 million at June 30, 2017 they could still make a full $100,000 non-concessional contribution in the 17/18 financial year. Do I read this correctly as it states a maximum of $100,000 for balances between $1.5 million and $1.6 million for the previous year, or could it just be allowing $1,000 extra to be contributed to achieve the $1.6 million threshold?

Answer: Under the new three-year bring forward rule relating to non-concessional contributions the maximum that can be contributed is limited by a member's superannuation balance. The balance used for this extra test is the member's balance at June 30 of the year prior to the contribution being made.

If a member's balance is less than $1.4 million the maximum $300,000 can be contributed. For someone with a balance of between $1.4 million to $1.5 million the maximum is $200,000. Someone with between $1.5 million up to less than $1.6 million has a maximum contribution of $100,000. This means what you read in the ATO newsletter, of you being able to contribute $100,000, is correct.