Are Tax Liabilities Diminishing The Appeal Of Self Managed Superannuation Funds?

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Are tax liabilities diminishing the appeal of Self Managed Superannuation Funds?

Did you assume that your Super ‘pension fund’ would automatically roll to your spouse or partner when you die? Did you realise they might be inheriting a large capital gains tax bill?

The ATO has recently released draft ruling TR 2011/D3 – Income tax: when a superannuation income stream commences and ceases. This puts their view on when a superannuation income stream (in other words, a pension) is deemed to start and end - issues not currently explicitly covered under the legislation.The reporting regime starts on 1 July 2012. Businesses that make relevant payments to contractors will need to keep information about these payments from 1 July 2012 and lodge their first annual report for the year ending 30 June 2013.

Why is this of particular concern to Self Managed Super Fund (SMSF) members?
SMSF trustees tend to hold assets, such as real estate, long term. Such assets have usually increased significantly in value and built up substantial unrealised capital gains. While these assets are held in a pension account ...
... the income and capital gains earned on them are exempt from tax and even their disposal will not attract any capital gains tax (CGT).

Unfortunately, many people in Self managed super funds Melbourne s operated on the assumption that after the move into the pension phase this exemption applied even after their death. But the ATO ruling explains that is not correct, that when a member dies the pension’s exemption ceases. The assets move out of their tax exempt pension phase and revert to a taxable accumulation phase – so when the assets are sold to pay a death benefit, CGT may be payable. The only exemption to this rule is where the death benefit is paid to a spouse or other person eligible for a reversionary pension.

To make matters worse, the longer a CGT liable asset has been held the greater the tax because it is calculated on the original purchase date of the asset, not the date of death. And to make matters even worse, the ATO is attempting to apply the ruling retrospectively to 2007.

What steps can a SMSF member take to protect their benefits?

Protect the tax benefits for the beneficiaries: the draft ruling reinforces a need for those with a SMSF that pays a pension to ensure that, where possible, their super can go to their spouse or other eligible beneficiary in the form of a pension where investment earnings will continue to be exempt from tax. Set up an estate plan that ensures this happens relatively quickly and minimises taxable income between death and the commencement of the pension.

Refresh the cost base: consider selling assets that have built up a big unrealised capital gain while they are still in the pension account. Refreshing the cost base is the most effective strategy trustees have at their disposal to reduce the impact of the death benefits tax. These assets can then be replaced with new purchases. Set the period between sale and new buy, and the choice of replacement investment carefully – as far as the ATO is concerned, selling a rental property one month and buying the same one back the next would be considered a wash sale rather than a rebalancing strategy.

Strengthen administrative systems: for example, ensure the minimum pension payment required under the SIS Regulations is made each year in order to avoid a pension being treated as having ceased; implement a Binding Death Benefit Nomination to remove any uncertainty about which intended beneficiary receives what portion of the estate; obtain regular reports on CGT liability.

The ruling highlights the importance for trustees of Self managed super funds Parkville to plan carefully before the commencement of a pension so as to reduce the effect of potential CGT and ensure the members’ overall estate planning objectives are achieved to the fullest extent possible. They must become more active in structuring and managing their arrangements, and using expert advice on how to do so, if they are to reap the benefits of their SMSF.

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