Q. I have a Self-Managed Super fund (SMSF) with my wife. The assets of the fund are approximately $2.1 million. My wife’s super account balance is around $420,000 and my pension balance is $1.68 million. I am 64 and my wife is 61 and we continue to work. As I exceed the $1.6 million dollar transfer balance cap, what do I need to do before 1 July 2017?
A. With just under 6 weeks remaining before the new rules come into effect, there are a range of important steps that you, as Trustees of your SMSF, will need to take.
You will also need to have a clear understanding of what is in Accumulation and Pension phase for you and your wife for both income and Capital Gains purposes.
Within your fund Pension and Superannuation accounts, you will be obliged to apportion income on the fund using the “proportionate method” to calculate and differentiate exempt pension income from income earned on funds in the accumulation phase.
You need to consider and decide when and if you wish to apply the new capital gains tax (CGT) relief provisions. Under the super changes, complying SMSF are able to reset the cost base of investment assets to their current market value where those assets are reallocated or re-apportioned from the retirement phase to the accumulation phase prior to 1 July 2017, in order to comply with the transfer balance cap or new transition to retirement income stream arrangements.
Where the assets of your SMSF are partially supporting interests in the accumulation phase, tax will be calculated on this proportion of the capital gain that is not in Pension phase on 30 June 2017. Whilst the Capital gain needs to be identified, any tax liability will be deferred until the asset is sold.
There are two methods of allocating assets in a Member’s Pension and Superannuation accounts within an SMSF; Segregation or Proportionate method. Segregation means that a specific investment asset is allocated to supporting specific Pensions and/or Superannuation accounts. Proportionate method means that the asset is owned by the SMSF as a whole and the value is proportioned on a percentage basis between the Pensions and/or Superannuation accounts.
CGT relief on the assets of the fund applies differently and is subject to different rules depending on whether the super fund uses the Segregation or Proportionate method.
The relief conditions apply to both methods provided action is taken between 9 November 2016 and 30 June 2017. This applies to all assets in a complying SMSF held throughout that period. If a super fund wishes to apply the relief, they must make this choice and notify the ATO on or before the day the trustee is required to lodge the fund’s 2016–17 tax return. A choice to apply the relief cannot be revoked.
Seek advice from your Accountant and your Financial Planner now. Ensure you comply with the changes and ensure you have all your valuations, reporting and documentation up to date.