Check tax exemption on income from super pension assets

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There is confusion about which method to use when calculating the tax exemption on income from assets supporting superannuation retirement pensions. This confusion stems from changes to the superannuation law that took effect from 1 July 2017 and the Tax Office’s interpretation of the tax law. Let’s clear this up.

The difference between segregated and unsegregated assets

As SMSF members will usually retire at different times, and because the tax treatment of income from SMSF assets differs between accumulation and pension phases, the correct proportion of tax-exempt and tax payable income needs to be determined. There are cases where specific SMSF assets are held for the benefit of specific members, meaning there is a segregation of assets. Or the assets can be unsegregated, where the SMSF’s assets and income will be supporting all members, retired or not. The existence of segregated or unsegregated assets determines how the tax exemption is calculated.

Unsegregated versus segregated method

If an SMSF has a member with a total super balance in excess of $1.6 million (as at prior 30 June) across all of their super funds, and the person is in receipt of a retirement pension, then the SMSF can only calculate the tax exemption using the unsegregated or proportionate method. This is regardless of whether the SMSF’s pension assets were segregated at any time during the current financial year.

If an SMSF has members in receipt of retirement pensions and each of these member’s total superannuation balance does not exceed $1.6 million across all their superannuation funds at 30 June of the previous financial year, then the SMSF can claim the tax exemption using the relevant segregated and/or unsegregated method.

For fund members with a total superannuation balance not exceeding $1.6 million, the Tax Office’s interpretation of the tax law is based on whether the SMSF had pension assets that were segregated at any time throughout the financial year. If so, then the SMSF must calculate the tax exemption using the segregated method for that time period.

If, during a financial year, an SMSF did have pension assets that were segregated but at a later time it no longer had segregated pension assets, then it must use the segregated method to calculate the tax exemption for the time period where the pension assets were segregated. It must use the unsegregated method to calculate the tax exemption for the period the SMSF’s assets were no longer segregated.

Prior to 1 July 2017, SMSF trustees and professionals were simply using the unsegregated method to calculate the tax exemption when SMSFs had segregated pension assets at some time during the financial year, and unsegregated assets at other times during the same financial year. They did this to simplify the tax exemption calculation. Unfortunately, the Tax Office has stated that using the unsegregated method for those situations is no longer an option from 1 July 2017.

Let’s look at an example

Assume an SMSF has two members in the accumulation phase on 1 July 2017. On 1 October 2017, both members commenced retirement pensions with their total superannuation balance of $1 million each. Then on 1 December 2017, one of the members makes non-concessional contributions into the SMSF and on 1 February 2018 commences a second retirement pension account.

This means the SMSF was completely in the retirement pension phase during the periods 1 October 2017 to 30 November 2017 and 1 February 2018 to 30 June 2018. However, the SMSF was not entirely in the pension phase during 1 July 2017 to 30 September 2017 and 1 December 2017 to 31 January 2018. The SMSF trustee will need to take into account four accounting periods. They must apply the segregated method of a 100% tax exemption on investment earnings of pension assets during the period the SMSF was completely in pension phase and apply the unsegregated method to the other periods when the SMSF was not totally in pension phase.

The calculation of the tax exemption is certainly more complex now and it is most important that SMSF trustees and professionals are aware of this.

 

Monica Rule is an SMSF Specialist and author. See www.monicarule.com.au.

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4 Responses to Check tax exemption on income from super pension assets

  1. Ian Fehlberg May 11, 2018 at 9:57 AM #

    Under Related Posts
    The top 10 hints for SMSF trustees before 30 June is for 2015.
    Is there an updated 2018 version

  2. Michael May 15, 2018 at 11:04 AM #

    Monica

    A useful article as there is a lot of complexity being introduced with limited communication on the detail by the ATO to Trustees.

    Re the statement in your article “If an SMSF has members in receipt of retirement pensions and each of these member’s total superannuation balance is less than $1.6 million across all their superannuation funds at 30 June of the previous financial year, then the SMSF can claim the tax exemption using the relevant segregated and/or unsegregated method.”

    Could you confirm this applies to the following situation when a member is receiving a pension from another Fund :

    1. Member 1 of the SMSF (total superannuation balance of > $1.6m across all Funds) has an accumulation account in the SMSF. Member 1 is in receipt of a retirement pension from another Fund (not the SMSF)
    2. Member 2 of the SMSF ( total superannuation balance < $1.6m) is in receipt of a retirement pension from the SMSF

    Can the SMSF claim the tax exemption using the segregated method as each (the) member in receipt of the retirement pension in the SMSF has a balance of less than $1.6m?

    • Monica Rule May 24, 2018 at 10:05 PM #

      Hi Michael,

      Sorry for the late reply. The answer to your question is “no”. The SMSF will not be able to use the segregated method. I have outlined this scenario in my May Newsletter in example 2:

      Example 2: Jack and Jill are members of their SMSF. At 30 June 2017, Jack has an accumulation account of $800,000 in his SMSF and a retirement pension account of $900,000 in another superannuation fund. Jill has a retirement pension account of $700,000 in their SMSF.

      In this example, Jack has a total superannuation balance of $1,700,000 (i.e. $800,000 accumulation account in the SMSF + $900,000 pension account with another super fund). Jack has a superannuation interest with the SMSF (i.e. his accumulation account). Jill is receiving a retirement pension from the SMSF. The SMSF is ineligible to use the segregated method and must use the unsegregated method to calculate the tax exemption. An actuarial certificate will be required and must apply to the full year of income.

      The full newsletter can be found here: http://www.monicarule.com.au/?page_id=1604

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