Whether they are transferring super pension amounts over $1.6 million into an accumulation account or applying for capital gains tax (CGT) relief on a proportion of pension investments that will become taxable from July 1, SMSF trustees who run their own funds should stick to plain and simple language in the documentation they prepare to comply with the new rules.
That’s the view of superannuation advisers in response to a reader’s request for possible draft wording of resolutions that will need to be implemented by June 30 in advance of the new super regime.
According to ipac South Australia private client adviser and SMSF specialist Peter Crump, where a member has either a combination of super pensions or a single pension that exceeds $1.6 million, the most important thing they should make clear in any wording is the intention behind any documentation they prepare.
The wording, he says, of any resolutions could be as simple as: “Dear trustee, what I want you to work out when you have the full fund account information for the 2016-17 financial year is where the pension balance exceeds $1.6 million to take appropriate action to move any excess into an accumulation account.”
Now the actual establishment of a new accumulation account, says Chris Malkin, a senior consulting auditor with Baumgartner Super, will require a separate resolution where a member with more than $1.6 million in pensions will ask the trustee to create an accumulation account to accept any excess super rolled back from a pension or pensions after June 30.
Any rollback, says Malkin, will need to bear in mind any special circumstances that might apply to particular investments that are folded back to the accumulation phase, like sizeable term deposits that have not expired as of June 30 that could result in more than the excess amount being rolled back.
Applying for CGT relief should be similarly straightforward, says Crump. A member who has a super balance above $1.6 million could ask the trustee of their fund to examine each fund asset on June 30, 2017 and, where the market value is above the purchase price, arrange for the cost base to be reset to this market value.
The trustee can then respond by stating they have received the instructions and will resolve to carry them out.
The language can be plain and simple, with the important message being the expectation that the instructions have been given by the required date and will be carried out by the time the fund has prepared its annual return.
Crump says there is no reason why the necessary documentation can’t be prepared well in advance of June 30.
As far as the commitment that members make by doing this, he says, what they are anticipating is that some of their pension balance will go into an accumulation account. Similarly, a proportion of pension investments transferred into an accumulation account will be entitled to CGT relief when they are eventually sold.
Any directions to transfer part of a pension into an accumulation account, says Graeme Colley, an executive manager with SMSF administrator SuperConcepts, is actually a commutation of the pension. Such an event can include instructions about how investment assets should be treated when there is a roll back.
It can, for instance, involve specifically allocating some investments to the pension phase and others to the accumulation phase, creating a fund that is described as being segregated.
In a segregated fund, the income and capital gains earned on investments identified as supporting retirement pensions are exempt from tax while income on investments supporting accumulation balances are taxable.
Alternatively, all assets could be pooled together and treated in an unsegregated way where any tax liability is calculated according to the proportion in the accumulation account.
A requirement of a fund being classified as unsegregated is a certificate from an actuary identifying the proportion of the fund in retirement phase.
But let’s look at a fund that has been in pension phase for all but one day of the year before a June 30 decision to roll back an excess amount above $1.6 million to the accumulation phase to comply with the July 1 pension limit. In this case, says Colley, an actuarial certificate will only be required if the fund earns income on the day of the roll back.
Where a fund earns no income before rolling back any excess to an accumulation account no certificate will be required.
This could be the case for a single-member SMSF in the pension phase with more than $1.6 million who is required to roll back the excess to an accumulation account before July 1.
A topical question about investments and the scope to segregate assets in the period leading up to July 1 comes from a reader who says both he and his wife have the allowed $1.6 million in a fund with a mix of shares, bonds and various property investments. All asset categories are kept in separate accounts but included in the total fund.
Can they segregate the investments, he asks, so the $1.6 million pensions have a stronger property element due to higher yields than from shares? In other words, can you specify what proportion of each asset category can be included in a pension or must it be a pro rata amount?
The answer, says Crump, is that once a member has an aggregate superannuation balance in excess of $1.6 million, they are locked out of the ability to maintain separate investment portfolios for tax purposes.
Some additional advice for funds in pension phase that find themselves having to sweep money back into an accumulation account, says Crump, is being aware of the potential death benefit nomination consequences. An existing nomination may refer only to the pension and not money that will have moved back to the accumulation phase. It will therefore need to be freshened up.
Any comments to John.Wasiliev@fairfaxmedia.com.au