Tax with Max: Pensions and the new cap
Summary: Selling shares for CGT purposes ahead of the new rules has risks, while retired couples with a balance above $1.6m should consider commuting a portion of their SMSF and investing the proceeds in their own names. |
Key take-out: The superannuation changes are new and not finalised, so professional advice is advisable in both cases. |
Key beneficiaries: SMSF trustees, retirees. Category: Tax, superannuation |
Q. Given the introduction of the $1.6 million limit in pension mode, and aggregating the profits for tax, does it not make sense to sell all shares making reasonable capital gains to consolidate profits prior to implementation of the changes? One could re-buy and perhaps re-weight the portfolio slightly?
ANSWER: Your idea of selling shares now with large capital gains while your fund is in pension phase, to realise the capital gains and not pay any tax, would work but result in the fund incurring transaction costs of selling the shares and is not really necessary.
In addition, your idea of buying back the shares at some later date could be fraught with danger as the ATO has signalled these sale and buyback strategies, where the sole or dominant purpose is obtaining a tax benefit, could be disallowed under part IVA of the Income Tax Assessment Act.
Thankfully, when the final form of the superannuation changes was announced towards the end of last year, the Turnbull Government and legislators recognised SMSF members that had been in pension phase for many years could be seriously disadvantaged.
To this end the legislation introducing the $1.6m pension transfer cap/limit included some capital gains tax relief for superannuation fund members. The CGT relief not only includes account-based pensions but also transition-to-retirement pensions rolled back to accumulation. To access the exemptions there are a number of actions that must be taken before July 1, 2017, which is being referred to as the 'pre-commencement period'.
For SMSF trustees to access the CGT relief the first step is to ensure that no member's pension balance exceeds the $1.6m limit by more than $100,000 at July 1, 2017, and the trustees of the fund must notify the ATO in writing of their choice to apply the CGT relief to assets of the fund.
How the CGT relief is applied to assets and investments of an SMSF depends on whether the fund currently uses the segregation or the proportionate method for calculating tax payable on accumulation accounts.
When a fund has both accumulation and pension accounts, up until the new superannuation changes, they had a choice of using either of the two methods. Under the segregation method the investments of the fund are allocated and split between pension accounts and accumulation accounts.
The proportionate method does not require assets to be allocated between the two types of accounts but instead an actuarial report must be obtained to identify the income that is related to the accumulation accounts, and therefore taxed at 15 per cent.
The ATO has advised that where all SMSF fund members are receiving account-based pensions, and the combined market value of all of the investments of the fund equals the value of the account-based pensions (in other words, all of the members are in pension phase and there are no accumulation members), the fund is regarded as being a segregated fund.
In this situation members must identify what value of the pension account exceeds the $1.6m limit, then partially commute the pension and roll back the excess into an accumulation account. At this point the trustees need to identify the assets that will be regarded as supporting the accumulation account and the cost base of those investments will be reset to their market value at the date of them being allocated to the accumulation account.
This will be done by there being a deemed sale and deemed purchase of the asset at the date of the transfer. Trustees of SMSFs will need to ensure that their accounting system will take account of the reset cost base for those assets used to support the accumulation accounts.
From July 1, 2017 SMSFs and small APRA funds, with a member that has a total superannuation balance that exceeds $1.6m before the start of each year and the member is receiving an account-based pension or similar retirement phase benefits, will no longer be able to use the segregation method.
This will mean from July 1, 2017 SMSFs in this position will need to use an actuary to calculate what proportion of the super fund's earnings relate to the pension account members and what relates to the accumulation account members.
I'm not sure whether actuaries will be required to calculate what part of capital gains made on investments that receive the CGT relief are tax-free, or whether this will need to be done by the trustees or their accountants at the super fund level.
Because the superannuation changes are so new and not finalised – for example, the approved form that must be lodged with the ATO for trustees that want to use the CGT relief has not yet been released – you should seek advice from a professional that specialises in the SMSF area as there are a number of strategies that can be used to reduce the impact of the super changes.
Q. Until now it didn't matter if a spouse had most of the money and the partner was light on. Is there any way of being able to even it up when both are over 65 and not working? It seems a retrospective tax to me, which is a bad precedent adversely affecting a small number of people.
ANSWER: When the superannuation changes were finalised, and the retrospective limit on non-concessional contributions of $500,000 was dropped, other parts of the proposed legislation announced during the election were also dropped.
One of the changes that did not make its way into the final legislation was the removal of the work test for people aged 65 and older who wanted to make super contributions. If both you and your wife are over 65 and not working there is no way that you can even up your superannuation.
Even if you were able to pass the work test, due to the non-concessional contribution limit being reduced to $100,000 it would be very hard to make a significant change where one of you holds the bulk of the superannuation in your SMSF.
Members that find themselves in an SMSF where one of them has most of the superannuation, that member has a pension account balance of more than $1.6m, and they have little to no investments outside of superannuation, should consider commuting a portion of their SMSF and invest the proceeds in their own names.
If the excess is not paid out and is instead commuted back into an accumulation account, the income earned on that portion of the SMSF assets will be taxed at 15 per cent. Due to the tax-free income threshold of $18,200, and the low income and senior Australian tax offsets, each member of a couple can earn approximately $28,000 a year and not pay income tax. On a 6 per cent income yield a married couple could have a combined total of investments outside of superannuation of approximately $900,000 and not pay any tax on the income.
This means that couples worried about being disadvantaged due to the introduction of the new $1.6m pension limit should seek professional advice to find ways that the adverse tax impact of these changes can be reduced and limited.
Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.
Got a question for the Tax with Max column? Email: askmax@eurekareport.com.au
General Advice warning: Eureka Report Pty Ltd: ABN: 84 111 063 686 AFSL No: 433424. This article may contain general advice and has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider if it is appropriate for your circumstances. Where the information relates to the acquisition of a product, you should obtain the PDS and consider this before making your decision