I have just finished presenting at a series of events related to the super changes commencing on July 1, 2017. A large part of each of the presentations was given over to answering questions from concerned self-managed superannuation fund trustees about how the changes would affect them.
There has been much confusion about what SMSFs can and can’t do with regard to segregation, and how the capital gains tax concessions related to assets being transferred back to accumulation will work.
There is a general misconception amongst SMSF trustees that if their super fund currently has members with more than $1.6 million in either pension or accumulation accounts, they cannot use the segregation method for the 2017 year.
The ban on SMSFs using the segregation method commences on July 1, 2017. This means the segregation method is still available to use for the 2017 financial year. Once this was made clear, a common question asked was, ‘How do I apply to use the segregation method?’
Most of the attendees were relieved to hear that the Australian Taxation Office recently issued advice stating an SMSF with all members in pension phase was regarded as automatically using the segregation method.
This means the only time trustees need to choose between the segregation and the proportional method is when a fund has accumulation accounts and pension accounts. SMSF trustees in this situation, who have a member’s pension balance of more than $1.6 million, should elect to use the segregation method for the 2017 year – from July 1, 2016.
Another worry for many SMSF trustees is that all of the transfers and corrective action, where they exceed the pension transfer balance cap, must be done before July 1, 2017.
The only documentation that can be prepared is a letter from members requesting that the trustees commute any excess in their pension accounts over the $1.6 million limit back into accumulation after member’s balances have been calculated at June 30, 2017, and prior to the SMSF accounts being completed.
The reality is, unless an SMSF has only cash holdings and term deposits, it is almost impossible to calculate what the balance of each member’s account is at June 30 each year. Where an SMSF holds managed investments, which trustees must wait to receive an annual tax statement from, it is rare for the accounts to be finalised until at least mid-October each year.
Once the member’s balances have been calculated, only then can trustees decide whether the claim the capital gains tax relief on assets allocated back to accumulation accounts.
It is at this point that the important difference between using the segregation method and the proportional method for claiming the capital gains discounts is evident. Where the segregation method is used, all of the capital gain – that is, the difference between the purchase cost of the asset and its value at the date of it being transferred to an accumulation account – is effectively tax-free.
If the proportional method is used, income tax will be paid on a percentage of the gain made; namely, the proportion that the accumulation accounts in the fund represent as a percentage of the total value of the fund.
Any professional adviser with high-net-worth clients who have the enviable problem of having more than the pension transfer balance cap, should communicate with them as soon as possible about the changes, or they could find their clients going elsewhere to get the advice.