Tax with Max: Changes to capital gains

Question. With two members with large super balances over the $1.6 million-mark previously using the unsegregated method but now 100 per cent in pension mode, is it a good strategy to set up a second super fund to hold the excess accumulation balances? Would this effectively remove the need to apply for the capital gains tax (CGT) relief leaving the high capital gain assets in the SMSF tax free pension fund?

Answer. When a super fund has all members in pension phase the ATO regards it as using the segregated method. This means you will be able to select the investments being transferred back to accumulation phase for claiming the CGT concession. As a result of the fund being totally in pension phase, it could not use the proportional or actuarial method.

Whether it will be worthwhile setting up a second SMSF to transfer the excess balance over $1.6 million will depend on how much that excess is. For this to be worthwhile the 15 per cent tax saving on the income earned on the accumulation accounts would need to exceed the cost of having a second SMSF.

On an annual cost for the second SMSF of $2500 per year you would need to be earning more than $16,700 in income on the accumulation accounts to make it worthwhile.

A second option could be to open an accumulation account with an industry fund and roll over the excess into this. Given that administration costs for most industry funds are less than $100 a year this could be a much better option.

Question. After June 30, will it be possible to elect to have withdrawals from the Transfer Balance Account (TBA), apart from the compulsory pension withdrawals, to be solely from the accumulation account leaving the pension account balance intact with its $1.6 million?

Answer. Your TBA will only be reduced when you take partial or full commutations of your pension. If you want to maximise the value of your pension account you would take the minimum pension required, and if you have an accumulation account, take any excess funding requirements from it.

Once your accumulation account had been reduced to zero you would then take any excess income requirements from your pension account as partial commutations. This would result in you being able to top up your superannuation pension account, if you are eligible to make further non-concessional contributions.

Question. With regard to the CGT relief, does a portfolio of 30 shares count as one asset or 30 assets? In other words, can you choose which shares on which to reset the CGT base? My understanding is that you cannot segregate assets and keep shares expected to improve in the pension fund and put cash with low interest rates into the accumulation fund.

Doesn't proportioning apply with balances above $1.6 million? And how will proportioning work if the total assets – accumulation and pension – increase in value by 10 per cent? Does the pension fund amount increase by the same amount or remain at $1.6 million?

Answer. Up until June 30, 2017 all SMSFs have the ability to use either the segregation method or the proportional method when a fund is made up of both accumulation and pension accounts. After June 30, an SMSF with more than $1.6 million is not able to use the segregation method when it has a mixture of accumulation and pension accounts.

Under the CGT concession legislation, a fund that chooses to use the segregation method can select what assets will receive the CGT concessions, and the assets which the CGT discount will not be applied to. This means the trustees of an SMSF with 30 shares can pick which shares will be transferred back to an accumulation account and decide whether the CGT concession will be claimed.

This clearly indicates the intent of the legislation. Trustees can select which assets they want to retain in the pension account, which are more than likely those that have the greatest likelihood of increasing in value; and transfer to the accumulation account those assets that are less likely to increase in value, or are income-related such as fixed interest deposits and cash.

Question. Where can I get a superannuation return calculator when the $1.6 million cap is exceeded, taking into account tax on excess compounding?

Answer. I am not sure where you can get a calculator that does this sort of calculation automatically. The service or accountant you use for preparing and lodging the annual accounts and tax returns for your fund should be able to provide you with this calculation, and if they can't, it's time to start looking for a new one.

Question. My query relates to the transfer of the excess over $1.6 million to accumulation and utilising the CGT relief available on shares held at September 9, 2016.

My accountant has advised that if a decision is made to utilise the CGT relief you can go through each share individually and choose the highest market value recorded between September 9 and June 30 and use that in the carry forward accounting figures as the cost base when calculating future capital gains.

On the other hand, my fund auditor disagrees and says that while those dates are applicable, all assets must be valued together at the chosen date and not valued individually at different dates. I have researched but can't find valid information. Who is correct?

Answer. In this situation your auditor is 100 per cent correct and I believe your accountant has not fully understood how the CGT concession will work. The valuation date for each of the assets selected for the CGT concession is the date that the assets are transferred back to the accumulation account.

This will mean if you transfer the excess balance over $1.6 million back to accumulation on September 9, 2016, it is the market value on that date that you would be using to reset the cost base of each of the assets you choose to claim the CGT relief for.

Theoretically, a clever accountant could look at transferring assets from the pension account back into accumulation account over a period of time that enables them to choose the highest market value.

In setting out the basis on which SMSFs can claim the CGT concession, the fund must have been using the segregation method from the date that the legislation was passed up until June 30, 2017, and the trustee makes a choice by lodging a form with the ATO at the time or before lodging the 2017 return for the fund. In addition, the concession cannot be used for purely tax minimisation purposes.

The Treasurer, in his explanatory memorandum about the superannuation reform package, included the following statement: “Schemes designed to maximise an entity's CGT relief or to minimise the capital gains of existing assets in accumulation phase – by creating the circumstances in which the choice may be made – may be subject to the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936.”

This means any clever accountant that thinks that they do not have to keep within the spirit of the CGT concessions, such as transferring assets back to an accumulation account over a number of different dates to maximise the cost base, could find that their clients will lose the concession altogether.