One of the great benefits of SMSFs is the considerable flexibility they offer to investors, particularly when it comes to taxation issues. Outlined below are two of the ways in which that flexibility can be used by individuals to achieve various goals which may not necessarily have been able to have been achieved using a public offer fund.
1. Tax write-back upon commencement of a pension
Say a member has contributed $100k to super during their working life and, upon retirement, the value of those contributions has increased to $250,000 due to a $150,000 unrealised gain that has accrued.
In both an SMSF and public offer fund, the member’s statement would not actually show a balance of $250,000. This is because in the event of a request for the payment or rollover of their entire benefit, the underlying investments would have to be sold and the gain crystallised, resulting in a tax liability of $15,000 (that is, $150k less 1/3 discount @ 15% = $15,000). This amount has to be deducted from the member’s balance under what accountants refer to as ‘tax effect accounting’ principles, so the $15,000 goes into an account called a ‘Provision for Deferred Tax Liability’. Therefore, the member’s statement would indicate a member’s balance of only $235,000, not $250,000.
While the recent market performance has been disappointing, this doesn’t necessarily mean there wouldn’t be a deferred tax provision. The deferred tax liability that would commonly be set aside by most public offer funds would be in the order of 5% of the fund’s assets.
For a member of an SMSF commencing a pension in these circumstances, upon conversion to the exempt environment, the accountant or administrator would write back the $15,000 provision subsequent to the commencement, which means the member would be immediately better off by an equivalent amount.
For the member of a public offer fund though, it’s a different story. For ease of administration, most public offer funds don’t have funds where members can simply convert from accumulation phase to pension phase. Public offer funds ordinarily require members to redeem their investment in the accumulation fund and acquire new units in a separate pension fund.
The effect of this is that members of public offer funds, in effect, pay tax on any unrealised gains that existed at the time they convert into pension phase. In the example above, the member would be adversely affected by $15,000.
2. Pro-active management of taxation affairs
Unlike public offer funds, SMSF trustees only have a couple of members to cater for and can attend to tax-planning opportunities in the following circumstances:
Year-end tax planning:
Funds which have made capital gains during the year and have a tax liability could consider crystallising losses on non-performing shares prior to year-end. Even if a trustee intended to retain shares that had unrealised losses, they could sell them prior to year-end to realise the loss and then re-acquire the shares soon after.
Upon commencement of a pension:
When a fund member is about to commence a pension, an investment schedule can be prepared which shows the unrealised tax position of each of the investments held by the fund. Investments that have unrealised losses can be disposed while still in accumulation phase (that is, tax losses are able to be utilised by members still in the accumulation phase) and defer realising gains until they have entered the exempt environment.
In some circumstances, trustees should consider segregating assets so as to ensure that this works out correctly.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
