Is it possible to have two SMSF funds? Answer: yes.
Does it make sense? Some people seem to think so.
The Australian Taxation Office has addressed the issue of multiple self-managed super funds and whether they will allow superannuation members to hold two such funds.
The practice of having more than one SMSF is not unusual and there is no doubt it has some increased attractions under the new superannuation rules around the balance cap. At issue is a situation where superannuation members holding one fund to allow for pensions considering the $1.6 million-per-member Transfer Balance Cap, with a second SMSF to enable for funds in accumulation mode therefore incurring 15 per cent taxation.
In April the ATO had seemed to indicate it would frown on a second SMSF being established. Let’s be clear that SMSFs operate under the same rules as employer funds, save for some restrictions, such as no more than four members.
Therefore, in the same way that an employee may have multiple employer funds there is no rule that says a member can’t have multiple SMSFs. What the ATO was concerned about was the use of more than one fund in relation to the new regime, particularly in relation to the $1.6m.
The ATO also raised the issue as to whether superannuation members may be enticed to move assets between the pension and accumulation funds after the pension has started (given one fund would be operating in pension mode at zero taxation and the other in accumulation at 15 per cent).
This is clearly not allowed as, once tested and irrespective of the movements in value either up or down, the pension fund is essentially a quarantined account for any activity except for pension payments and any reporting that may be required from time to time.
Therefore, the reasons many accountants have been recommending multiple funds to their clients includes the following:
● Rather than risk a mistake which would compromise their pension under the $1.6m Total Balance Cap aggregate, they will create one fund for the TBC and for excess amounts over the TBC they establish another fund for the accumulation proportion.
● In doing this, super members feel they are protected as there is never any concern with the TBC pension fund, as it has been tested accordingly and provides an ongoing pension.
On the other hand, there are obvious negative considerations that need to be considered such as:
● Cost: Each fund needs audit, reporting and administration costs to maintain the fund.
● Complexity: Having two SMSFs is a complex structure that must be accounted for properly, especially ensuring rules are not circumvented and each fund is run as an independent fund.
● It is also unlikely that one asset can be partially owned by both the pension fund and the accumulation fund.
● Where a super member wants to pursue such a strategy and is over the TBC — but doesn’t have sufficient excess funds to warrant the cost of establishing and operating a new SMSF for the accumulation component — they can choose to continue the SMSF and use a public offer fund for the excess amount.
One issue that has become apparent since these rule changes came into place on July 1 is for those with large single assets in a fund, for example business real property.
Appropriate steps need to be undertaken to ensure the property and other assets in a pension fund can meet the prospective pension payments. The only alternative otherwise is for such large single assets to be sold or placed in an accumulation fund.
The concern is in relation to what happens to the accumulation fund. Again, the intent must be clear: this fund will operate as an accumulation fund save for withdrawals being allowed after satisfying a condition of release.
The simpler alternative is for members to have properly segregated accounts for both the pension and accumulation. This will incur costs for the segregation work and reported accordingly, but is cheaper than running two SMSFs. It is a case of one size doesn’t fit all. I recommend treading cautiously around whatever arrangements are decided upon to ensure the rules are adhered to in entirety.
By Will Hamilton
18 November 2017