Among all the superannuation changes due to be introduced on July 1, one measure in particular seems to be causing much concern. Interestingly, it is a measure that will benefit self-managed super fund (SMSF) trustees, rather than be a potential negative.
When the government first announced the limit on the amount that can be transferred to a super pension and the removal of the tax-free status of transition to retirement arrangements, a big issue for many members was how to deal with their super fund assets if they had more than $1.6 million in pension accounts or were running a transition to retirement income stream (TRIS).
In the case of the former, any amount above $1.6 million will have to be moved back to an accumulation account by July 1, as will the entire TRIS.
If you are already in a TRIS, you have the potential to sell any underlying assets that support the income stream free of tax, as under the current rules any TRIS is tax free. So should trustees do just that before the rules change?
The first question to always ask should be about whether you believe that the assets still have the potential to service your retirement needs, whether by capital growth or income return.
Conscious of the potential impact on markets if there was a selling stampede in the run-up to the rule changes, the government provided trustees with a TRIS or more than $1.6 million in a private pension, the potential to receive capital gains tax relief. The effect of this is to deem a sale and repurchase of the underlying assets, without the need to actually sell. This allows the cost base of the asset to be lifted to its current market value, eliminate all (or some) of the capital gains that have accrued until now and avoid unnecessary transaction costs. The restructuring must be completed no later than June 30.
For retirees with a private pension, this raises the question: if you don't know the value of your assets on June 30, how do you know how much you need to move back to an accumulation account and which assets to claim capital gains tax relief on?
Happily, SMSFs have an advantage here.
When it comes to the application of CGT relief, the key will be for trustees to demonstrate that they have made a decision to move account balances in order to comply with the new rules. The best way to do this is via a trustee resolution, appropriately documented, to show that the trustees want their pensions to be restructured with effect from June 30 so they will be complying with the new rules when they commence the following day.
Then, when the administrators prepare the SMSF's accounts for the year to June 30, by which time the assets will have been valued, the accounts can be adjusted to reflect the trustee resolution. It would mean the accounts at June 30 show a pension balance of up to $1.6 million, with any excess now appearing in an accumulation account. A TRIS would still be reflected as a TRIS, assuming it is to continue, but will be taxed differently from July.
The level of relief will depend on whether the SMSF operates on a segregated or proportionate basis. Segregation occurs where assets are physically allocated (or tagged) to particular accounts in the fund. As a result, all returns (capital and income) on those assets would go to those accounts. The proportionate approach, which is arguably simpler, applies where all assets are pooled and a percentage of each asset belongs to each account.
The choice of using a segregated or proportionate approach is one that your SMSF would already have made, assuming you are running pension accounts. If you are unsure, you can ask your administrator. The easiest way to know is to look to the last tax return for the fund and ask the administrator if an actuarial certificate was required to work out the tax-free status of pension assets. If there was one, it means you are using the proportionate approach. If not, it means it's segregated. From July many SMSFs will lose the ability to use a segregated approach for tax purposes.
There is a lot for SMSF trustees to consider about the potential application of CGT relief. The good news is that it doesn't all have to be done before June 30, but you also can't afford to wait. The decision to use it needs to be made and evidenced before July 1 and the choice must be made for individual assets. You need to decide the right assets to seek relief on, and which assets should move back to accumulation phase.
The best way to ensure you apply these rules correctly is to ensure you are getting the right advice from your professional support network. It's a great example of where you need your adviser, administrator and tax agent to be working together to ensure the right decisions are made to support your retirement plans.