Tax with Max: Navigating the CGT concessions maze

Question: Your recent comments in a couple of Eureka Report articles have stated that for those SMSFs currently paying a pension on the total assets in the fund, trustees nominate the actual assets which will transfer to an accumulation account.

However, reading articles from various financial planners I have learned that trustees can instead elect to commence using the proportional method from July 1, 2017. In this case the assets whose total value is in excess of $1.6 million at June 30, 2017, would represent the accumulation account balance but individual assets would not be nominated.

In a fund currently with one member and assets of $3.2 million, all underpinning a pension, $1.6 million would be credited to each of the pension and accumulation accounts without specifying what individual assets support these two balances and in future, all calculations for income, capital gains etc would be apportioned at 50 per cent between the two accounts. Is this correct in your view?

Answer: The important thing to understand, with regard to using either the segregation or the proportional method prior to July 1, 2017, comes down to whether a super fund has a mixture of both pension and accumulation accounts.

The Tax Office has confirmed that a super fund that has all members in pension phase is classed by them as using the segregation method. This means, in the example that you have given, the SMSF with $3.2 million all in pension phase will be classed as using the segregation method.

In fact, the only way that SMSF could use the proportional method would be to have a contribution made to the fund before June 30, 2017, which would be classed as an accumulation account.

It makes more sense from a capital gains and income tax point of view for a fund to be classed as using the segregation method. This is because assets transferred to an accumulation account, as a result of the introduction of the pension transfer balance cap, will get the maximum benefit from the capital gains tax concessions.

You are right that in the case of your example, where the SMSF is made up of a pension account of $1.6 million and an accumulation account of $1.6 million, the proportional method must be used. This effectively means 50 per cent of any income or profits made will be allocated to the accumulation account and taxed accordingly.

Question: What is the use of a fund specifying particular assets to be transferred to the accumulation account given that the proportionate method must be used after July 1, 2017 to distribute all income and realised capital gains proportionally between pension and accumulation accounts? It seems to me no benefit whatever!

Answer: If an SMSF does not specify assets as being transferred to the accumulation account, for which the capital gains tax concession is claimed, the fund will unnecessarily pay income tax on any future capital gains made on the assets of the fund.

If an SMSF will continue having accumulation accounts and pension accounts after July 1, 2017, under the proportionate method, a percentage of any future capital gains made will be apportioned to the accumulation accounts and tax paid at the relevant rate.

If instead those assets with unrealised capital gains are segregated, transferred to the accumulation account, and the capital gains tax concession claimed in the 2017 year, no tax will be paid on those assets when they are sold in the future.

For example, an SMSF with $2.4 million in a pension account, and assets with a market value of $600,000, and unrealised capital gains of $100,000, if the capital gains tax concession is not claimed in the 2017 year income tax will be paid on half of the $100,000 when those assets are sold.

Question: My administrator has drafted a minute to me which aims to reset all asset parcels with unrealised capital gains, while leaving all asset parcels with no gains at their original cost base. Is this the correct thing to do?

Answer: I do not see any harm with what your administrator is doing as it will make sense, given that the proportional method will apply to SMSFs that exceed the $1.6 million limit from July 1, 2017, to protect any unrealised capital gains existing at June 30, 2017.

I do not believe it is necessary for such a minute to be drafted so that the fund could take advantage of the capital gains tax concessions. As there is a duty on trustees to protect the members of an SMSF, which includes maximising their returns, the claiming of the capital gains tax concession can be done as a part of the normal administration of the fund.

Question: I am 68, still working, drawing a pension, and after June 30 I will have at least $1.6 million in my SMSF. My wife is 58 and will leave her money in accumulation mode as she will continue to work and probably start a TTR once she turns 60. She may have over $1.6 million in her fund. If we both have over $1.6 million in pension phase can we still each make $25,000 concessional contributions?

Answer: When a super fund member has $1.6 million or more they cannot make any further non-concessional after-tax contributions. You will be able to make the concessional contributions as there is no ban on people making concessional tax deductible contributions based on the value of their superannuation, as long as they pass the work test if they are 65 or older.

I suggest that you get professional advice in relation to what your wife is planning to do once she turns 60. As you will be in pension phase and have reached the pension transfer balance cap, and because TTR pensions will have their income taxed as if it was in accumulation after July 1, 2017, I am unsure as to what benefit there will be from her commencing the TTR pension.

Question: I've read, “If you're already in pension phase and have an SMSF, you won't get a chance to choose which assets can be split off from a tax perspective because your fund will be assessed on a proportional basis and will not be allowed to be assessed on a segregated basis for tax purposes. But you will get a choice for CGT purposes. You can't pick and choose whether losses will be offset against taxable earnings, it must all happen proportionally”, is this correct?

Answer: What you have read is correct with regard to how superannuation funds will be treated after July 1, 2017. An SMSF that has a member with more than $1.6 million will be unable to use the segregation method for assessing how much income of a super fund relates to pension account and is tax-free, and instead the proportional method must be used.

The comment about being able to choose what assets are segregated for capital gains tax purposes is correct for the 2017 year. When assets are transferred back to accumulation from pension phase the segregation method can be used for selecting those assets that the capital gains tax concession will apply to. However, after July 1, 2017, an SMSF with members having balances of more than $1.6 million has no choice available and the proportional method must be used.