SMSF advisers who are not proactive with clients who either have superannuation balances in excess of $1.6 million or are receiving a transition-to-retirement (TTR) pension could find themselves in the firing line after July 1, 2017.
Those advisers with clients whose balances already exceed the $1.6 million pension transfer cap should be advising them of the importance of taking corrective action before July 1. The amendment to the super regulations has introduced a new term to cover the time period until July 1. It is called the “pre-commencement period”.
It’s fortunate the Turnbull Government and legislators recognised that SMSF members who have been in pension phase for many years, who have investments with large unrealised capital gains and balances in excess of $1.6 million, could be seriously disadvantage when it comes to capital gains tax.
To this end, as long as the members of an SMSF do not exceed the $1.6 million pension limit by more than $100,000, capital gains tax relief has been built into the legislation. This means assets allocated back to accumulation accounts will not incur tax on unrealised capital gains as at June 30, 2017.
What has not been well understood is that this CGT relief not only applies to account-based pensions rolled back into accumulation phase, but also to TTR pensions that are rolled back into accumulation phase as a result of the change in super taxation rules.
This puts advisers in a precarious position if they do not do a proper assessment of the benefits and costs of clients continuing with TTR pensions. An assessment should be done of exactly what the net benefit would be of the client remaining in a TTR pension, especially for clients under 60.
Where it is decided that the client will retain a benefit by continuing with a TTR pension, an assessment needs to be made as to whether the client would benefit from commuting the current TTR pension at June 30, 2017, and commencing a new TTR pension from July 1.
There are, in fact, two methods of calculating the CGT relief for SMSFs. The first relates to those funds that use the segregation method and the second relates to those funds that use the proportional or actuarial method.
To be eligible for the CGT relief, where a fund has been using the proportionate method, it must meet the following conditions:
- it must have been a complying superannuation fund throughout the pre-commencement period
- it must have held all of the assets throughout that period
- the proportionate method must have been used by the fund throughout the pre-commencement period, and
- the trustees must choose to receive the relief by advising the Australian Taxation Office in writing.
Under the CGT relief for funds using the proportionate method, the assets are deemed to be sold on June 30, 2017, and reacquired immediately afterwards at their market value. This will reset the cost base for those assets to their market value at that time.
Where the fund has a proportion of assets allocated to accumulation accounts at June 30, 2017, SMSF trustees have a choice as to when the super fund pays tax on these gains. The tax can either be paid on the lodgement of the 2017 return or can be deferred until the assets with the gain are sold.
If no action is taken before July 1, 2017, for SMSF with members who have TTR pensions, trustees will face the prospect of paying tax on the unrealised capital gains that existed at June 30, 2017. In that case, advisers would face the risk of being sued, if they had not warned the trustees.