The 2017 tax breaks for SMSFs

The 2016 year will be remembered as another 12 months of uncertainty, instability, and change.

It was felt across all areas including politics, economics, and investment markets, but the changes that will affect most Australians relate to superannuation.

SMSF trustees who ignore the new superannuation rules that take effect in 2017 do so at their own peril. And it will be a brave trustee that ignores the potential shock to investment markets resulting from the election of Donald Trump as US President and the continuing political and social turmoil.

Interestingly, if this uncertainty and chaos leads to a major crash in worldwide stock markets between now and June 30, 2017, this could actually benefit SMSF members currently with pension account balances above the new pension account transfer limit of $1.6 million.

This is because, under the rules relating to the pension transfer limit, with investment earnings and pension payments not affecting a member's transfer account balance, a major share market crash would result in a member's pension transfer account balance reducing before the key date of June 30, 2017.

If members are not forced to sell shares to make pension payments, and share markets recover as they have done after previous crashes, the increase in the value of the shares will result in a higher amount being retained in the pension account.

Because of how the new pension transfer balance limit will work, and how pension accounts with balances over $1.6 million will be treated in the first year of the new system, it is important that SMSF members understand the new system and take steps before it is too late.

Claiming capital gains tax relief

Superannuation members with pension account balances over $1.6 million, who are required to commute the excess portion of the pension balance and roll it back into accumulation, could have been disadvantaged with regards to capital gains tax for the investments that would no longer support a superannuation pension.

In recognition of this there will be transitional CGT relief for superannuation funds that reallocate already apportioned investments between November 9, 2016 and June 30, 2017. The CGT relief will differ depending on whether an SMSF uses the segregation method or the unsegregated actuarial method for identifying pension assets and accumulation assets.

Segregated assets

For super funds that segregate their pension assets from their accumulation assets, and where a member rolls back into accumulation the estimated excess pension account balance before July 1, 2017, those assets being reallocated to the accumulation account will effectively have their cost base reset.

To benefit from the resetting, the cost base of these investments in the superannuation fund must have segregated current pension assets at November 9, 2016. In other words, it must have been using the segregation method before the changes were legislated.

In addition, the investment asset must either cease to be a segregated pension asset and become a segregated accumulation asset before July 1, 2017, or the fund needs to choose to use the unsegregated actuarial method for determining exempt income for the 2017 financial year and apply for CGT relief by notifying the ATO.

The CGT relief will effectively mean the cost base for all segregated pension assets that are reallocated to support an accumulation account is reset to the market value at the time of the transfer.

As a result, capital gains tax will only be paid upon the sale of those investments on any increase in value from July 1, 2017.

Where CGT relief is claimed for assets, care needs to be taken because the ownership period for the one-third CGT discount available to SMSFs is also reset. This means that if an SMSF member reallocates segregated assets at March 31, 2017, and claims the CGT relief for that asset, if it is sold before April 1, 2018 the one-third CGT discount will not be available.

Unsegregated assets

Super funds that use the unsegregated actuarial certificate method for differing between pension and accumulation assets can also apply for CGT relief on the pension assets reapportioned to accumulation assets.

In this situation the cost base of all investments of the superannuation fund are reset at June 30, 2017 to the market value as a result of there being a deemed sale and buyback occurring on that date. A notional capital gain will be calculated as having been made by the fund on all of its investments at June 30, 2017.

What about SMSFs that currently have both accumulation and pension accounts before the roll-back of the excess pension transfer limit?

The proportion of the notional capital gain relating to accumulation assets can either be included in the 2017 tax return for the SMSF, with tax being paid then, or the notional gain can be deferred and declared in the tax return of the year when the asset is sold.

This effectively means any assets that had previously been supporting pension accounts, which have now been classed as supporting an accumulation account, will not be paying capital gains tax on any unrealised gains at June 30, 2017.

An SMSF will not be eligible for the CGT relief unless the amount that a member's pension account exceeds the new pension transfer limit is less than $100,000 at June 30, 2016.

There are other concessions available to members who are proactive and make sure that their pension account does not exceed the transfer limit by more than $100,000.

These include no deemed notional earnings being calculated on the excess that would normally be required to be transferred back to accumulation, and no excess transfer balance tax will be payable if the excess is rectified within six months.

New contribution rules for self-employed

Another change to the superannuation rules that Eureka Report subscribers should be aware of is the change in the rules relating to tax-deductible self-employed super contributions.

From July 1, 2017, they will become personal deductible super contributions.

Currently, to make a self-employed tax deductible super contribution, a person must either not receive any employer Superannuation Guarantee concessional contributions or their employment income must be less than 10 per cent of their total assessable income.

Under the changes there will no longer be any restrictions on individuals making tax-deductible super contributions other than those that apply to concessional contribution limits and the work test for people aged 65 up to 74.

This means those with investments outside of superannuation, that are employed, should consider delaying realising capital gains on investments until after June 30, 2017 so that they can claim a personal super contribution to reduce the tax payable on those gains.

Don't ignore the super changes

To labour a point the best advice I can give for the coming year is don't ignore the superannuation changes.

Unless action is taken by members with pension accounts in excess of $1.6 million during the 2017 year they could miss out on capital gains tax relief, have a larger amount be classed as in excess due to deemed earnings, and pay the excess transfer balance tax.

Got a question for the Tax with Max column? Email: askmax@eurekareport.com.au

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