12 September 2017
The new $1.6 million limit on tax-free superannuation retirement accounts may tempt some self-managed super fund trustees to apply creative valuation methods to maximise their interests. However, the Australian Taxation Office has warned trustees that manipulating valuations will not be tolerated under the new regime.
There are two instances where valuations are important in the context of the super rules that commenced on 1 July. The first is where an SMSF member has moved excess assets from the retirement phase to the accumulation phase due to the $1.6m transfer balance cap.
If, for example, an SMSF member had $2m in a tax-free super pension account before 30 June 2017, $400,000 was required to be removed before 1 July 2017 in order to keep the pension account under the $1.6m cap. The government provided capital gains tax relief such that assets moved in order to satisfy the $1.6m transfer balance cap had their cost basereset to the marketvalue as at 1 July 2017.
In other words, the $400,000 moved from the pension account to the accumulation account, although it may have accumulated significant capital gains over the years in a pension account, would be deemed to be sold and repurchased with a 1 July 2017 cost base with no immediate tax implications.
In the future however, the capital gains tax rate on the $400,000 in the accumulation account would be taxed at 15 per cent for assets held less than 12 months, and 10 per cent for assets held for more than 12 months.
Needless to say valuations can affect outcomes. Imagine if the $400,000 transferred from pension to super had its value inflated to
$800,000. Rather than a $400,000 cost base for a $400,000 asset, the cost base is $800,000 for a $400,000 asset. The result — the
$400,000 could increase by 100 per cent in value before any capital gains tax would be payable.
But be warned, the ATO is one step ahead and has warned of those considering manipulating asset values higher to avoid future capital gains tax. SMSF segment assistant commissioner Kasey Macfarlane says: “If we saw an SMSF picking a value at the upper end of the range for the transitional CGT relief, but then picking a value at the lower end of the range for the transfer balance cap, you can be sure that you’ll be hearing from us.”
The second instance where valuations are important is where assets are undervalued to sneak more under the $1.6m tax-free pension cap. Luke Star, Certified Practising Accountant from Star and Associates says: “Some may be tempted to water down SMSF asset valuations to get more inside the $1.6m tax-free pension cap, particularly if their super balance just exceeds the cap and they hold assets that are not priced on a daily basis, such as collectibles.”
But again, the ATO has this covered. Macfarlane says: “The ATO will be monitoring changes in behaviour in relation to SMSF asset valuations as a result of the changes where we see significant reductions in asset valuations in SMSFs, particularly, coincidentally if it puts somebody just below a particular cap or limit, then that will attract our close scrutiny.”
The ATO talks tough
Some in the industry believe SMSF trustees have been given a raw deal with the recent super changes and the strong-handed compliance approach from the ATO. Tim Ricardo, SMSF specialist from Ricardo Accounting suggests: “It comes as no surprise that taxpayers and pensioners are confused during this disaster of a super policy brought in by a government that was once innovative and encouraging toward self-funded retirees.”
No wonder some are angered. The new changes come at a time when the accounting industry has been turned on its head after losing the ability to advise its clients about super without more red tape licensing and cost. Any of the remaining accountants that can advise on super have been dumped with deciphering a quagmire of Law Companion Guidelines, many of which stretch to more than 100 pages each.
The ATO’s response to trustees has been threats of severe penalties and it has backed this up by increasing administrative penalties after 1 July 2017. Current penalties range from $1050 up to $12,600 for certain breaches of the SIS Act.
With the ATO shining a light on valuations given the potential taxation benefits achieved by sliding values either higher or lower depending on the situation, a good way forward for SMSF trustees is to continue with their current valuation methods. The ATO is more likely to step in if different valuation methods are used for different tax purposes to benefit the taxpayer rather than the ATO, or when trustees have not been consistent with their valuation methods. As a broad approach to valuation, Ricardo says: “General valuation principles require demonstration of a fair and reasonable process in obtaining the valuation.”
One last thing, the ATO has valuation guidelines for SMSF’s on its website and all trustees should make it a point to review their SMSF valuation methodology.
James Gerrard is the principal and director of privately owned Sydney financial planning firm FinancialAdvisor.com.au