31 January 2016
One of the biggest issues facing all advisers this year is how to guide investors through the forthcoming changes in super — importantly, there is a need here to get your house in order or you could be facing a hefty tax bill.
It is also crucial that investors understand the mechanics of capital gains tax relief if they are considering selling assets prior to the new rules coming into force.
The new $1.6 million cap, which takes effect from July 1, places a limit on pension accounts that receive tax-free investment earnings. If you have more than $1.6m in your pension account, you must either retain the excess in your accumulation account (where the investment earnings are taxed at maximum of 15 per cent) or withdraw the money from superannuation.
If the excess is not removed, you will incur an excess transfer balance tax of 15 per cent in the 2017-18 financial year and your pension will be deemed as not being in pension phase from the start of the financial year.
This may mean your pension income is no longer tax free when you receive it. If an SMSF member moves some of their pension assets back to the accumulation phase before July 1, 2017, they can apply for capital gains tax relief so they only pay tax on the capital growth of assets from July 1.
SMSF trustees can choose which assets they provide the relief to and do not need to sell assets to apply the CGT relief. However, the CGT relief is not automatic and an SMSF will need to make an irrevocable election, in the ATO’s approved form, before it lodges its 2016-17 tax return. The relief deems an asset to be sold on June 30, 2017 for its market value and repurchased at that price. This ensures only gains from July 1 onwards will be taxed.
If the CGT relief is applied and an SMSF asset was segregated prior to November 9, 2016, then the entire capital gain arising from the segregated assets will be disregarded. If an SMSF uses the unsegregated method (because it has assets that support both a pension account and an accumulation account) then the notional capital gain on the non-exempt portion will be included in the SMSF’s assessable income for the 2016-17 financial year. It is worth knowing, however, the SMSF can elect to defer the notional gain until the asset is sold.
SMSF members also need to be aware that by choosing the CGT relief, they must wait a further 12 months before the CGT discount can be claimed.
New year’s checklist
Members affected by the new law will need to discuss their situation with their accountant or financial planner. Here’s a list of the key items to be considered:
- Members under the age of 60 with multiple pensions need to consider whether to commute the pension with the higher taxable component to minimise the tax payable on their pension
- Members with a pension which commenced prior to January 1, 2015 need to decide whether they wish to preserve their entitlements to the age pension and the Commonwealth Seniors Healthcare
- If a member is withdrawing the excess amount from their SMSF, then they need to weigh up the benefit of the $18,200 tax-free income threshold and their marginal tax rate compared to the 15 per cent superannuation tax
- The new reduced contribution limits may make future contributions more
- Whether to maintain assets with unrealised capital losses at their original cost base, and reset the cost base of assets with large
- If there are plans to sell assets soon, it may be more tax effective not to apply the relief due to the 12-month waiting period to claim the CGT
- Whether choosing the CGT relief will produce the best tax result. It may depend on when the member retires and the expected growth of the SMSF assets. For example, if a member is within the $1.6m cap and will retire soon, it means their SMSF will wholly convert to pension mode. Applying the relief to an asset may cause the SMSF to be taxed on the deferred notional capital gain when the asset is sold. If the relief was not chosen, this tax may not arise as the pension’s earnings exemption would otherwise apply.
Monica Rule is an SMSF specialist and author of The Self Managed Super Handbook.