Q: I have read commentary suggesting that SMSFs which exceed the $1.6m super limit should consider opening a second SMSF. What would be the benefit of such a strategy?
A: July 1, 2017, marks the introduction of $1.6 million limit on the amount of superannuation savings that can be transferred into an income stream to receive the tax exemption on investment earnings and capital gains.
This should not be confused with the general transfer balance cap of $1.6m, which also comes into effect from July 1. For people with a total superannuation balance greater than or equal to the general transfer balance cap of $1.6m, they will be unable to make any further non-concessional contributions.
Opening a second SMSF will not assist with avoiding the general transfer balance cap of $1.6m as it operates on a total superannuation balance across all funds.
For SMSF members who have superannuation savings in excess of the $1.6m limit, the tax exemption on investment earnings will be reduced as the assets of the fund will be required to be unsegregated. This means earnings on the assets of the fund are proportioned between the tax-exempt portion within the income stream and the taxable portion with the superannuation fund in accumulation phase. Should an asset (such as property) be sold, only a portion of the capital gain will be tax-free, not all of it.
SMSF members who might be considering a second fund would be doing so presumably for tax reasons. This strategy would allow the accumulation and pension phases to be held in separate SMSFs. This separation means $1.6m would be contained within an income stream within a SMSF and all excess funds above the $1.6m limit would be contained in another SMSF. Thereby theoretically negating the change in rules around segregation of assets.
The advantage of this strategy is being able to dispose of assets held within the income stream SMSF with no capital gains tax. Furthermore, if the asset increases in value once the income stream has been commenced, again no capital gains tax on disposal. As an example: John (age 62 and retired) and Julie (age 64 and retired) each commence a pension within their original SMSF for $1.59m as at August 1, 2017. In October, they transfer any remaining member balances to another SMSF. They also decide to retain the existing investment property within the original SMSF. The property was purchased in 2009 for $720,000 and valued at $1.02m at August 1, 2017, when commencing the pensions. Due to a surge in the property market in early 2018, the value increases to $1.35m. John and Julie can sell the property and no capital gains tax will apply. Prior to July 1, 2017, a SMSF could achieve this outcome within one fund using the segregated pension method. The change in the legislation has removed the segregated pension method, therefore creating interest in the strategy of having two SMSFs.
The Australian Taxation Office has flagged the potential for this strategy to be considered a tax avoidance measure under Part IVA of the Income Tax Assessment Act. A dual SMSF strategy cannot be done purely for tax reasons. Other reasons need to exist, such as estate planning, investment opportunities or complying with the maximum number of members, which is four or less. It is very important to seek advice and document any reasons as to why a second SMSF is appropriate.
17 June 2017