Do new rules create incentive for single member SMSFs?

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Are you a member of an SMSF or small APRA fund (SAF)? Are your circumstances, aims, goals and objectives similar to those of your fellow members? Particularly, are you in the same phase of superannuation? No? Well your position will be changed dramatically from 1 July 2017.

Contrary to the statement in Treasury’s Budget 2016 Making a fairer and more sustainable superannuation system fact sheets and Q&As that “In the superannuation system, and most areas of tax, people are taxed and treated as individuals not families or households”, for members of SMSFs and SAFs the tax outcome of earnings on assets owned by one member will depend on the tax position of other members.

This reflects that in seeking to avoid members with accumulated super benefits in excess of $1.6 million segregating assets in pools to achieve a tax advantage, the new rules also prevent segregation of assets by member when it comes to calculating the fund’s tax liability.

A simple example of the issue is an SMSF or SAF with only two members, one in pension phase and one in accumulation phase. When the fund realises an asset in order to make a pension payment and so makes a capital gain (inevitable with the working of the increasing pension factors) that capital gain will be taxed solely because the other member is still in accumulation phase. Which member should bear the cost of this tax? – the pensioner, who if in any other fund would have no tax liability, or the accumulator, who would have no need to realise the asset?

Those members of SMSFs and SAFs finding themselves in this unexpected position of their benefits being taxed because of the other member may find it difficult to extricate themselves because rolling their benefits out to an unaffected fund will trigger a potential capital gains tax event in their current SMSF or SAF. Given the imminent implementation date, you need to be talking to your superannuation advisor ASAP.

In this simple move away from people being taxed as individuals not families or households or SMSFs and SAFs, the new system is not fairer and the Government has created an advantage for the industry and large retail funds and an impetus to single member SMSFs.

 

Rick Turner is a client adviser at a leading stock broker. This article is for general information only and does not consider the circumstances of any individual.

 

SMSF expert, Monica Rule, has provided her feedback on the points made in this article:

Rick Turner is saying that if there are two SMSF members and one is in accumulation phase and the other is in pension phase, then their SMSF would need to pay tax on earnings from assets and capital gains from the sale of assets that are supporting the pension account from 1 July 2017. This is because you can no longer segregate assets to support a pension if your superannuation balance exceeds the transfer balance cap of $1.6 million. The tax payable will be on the portion that represents the members’ accumulation accounts.

He is also referring to the fact that if the same member was in a retail superannuation fund, due to the number of members and pool of assets, the member would possibly incur less cost in his superannuation account.

Going forward from 1 July 2017, SMSFs will incur more costs due to the amount of additional work accountants will have to do to keep track of members’ personal transfer balance accounts as well as keeping records of the actual members’ pension and accumulation accounts.

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One Response to Do new rules create incentive for single member SMSFs?

  1. John De Ravin March 2, 2017 at 3:34 PM #

    If a member regards their super balance as belonging strictly to them and not their partner, then the allocation of tax is unfair. But many couples would regard their superannuation fund (and other financial assets) as being a joint asset notwithstanding that the fund has separate member account balances. For example, the partner in the higher tax bracket might often give assets to their partner to reduce the total tax burden on the couple. Such couples wouldn’t tend to be concerned by the (mis-)allocation of tax. Even in the case of divorce, it’s not the case that “the husband’s balance belongs to the husband and the wife’s balance belongs to the wife” – the court can, and does, split balances in the way it deems fit to make an appropriate overall distribution of the assets of the couple.

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