Your SMSF clients would be horrified to realise that a small difference in how one starts a pension could result in considerably more investment tax being paid. We have gotten used to the idea that capital gains tax can vary markedly depending on whether the realization takes place in accumulation or pension phase. The legislative changes create a lot more circumstances where this difference in outcomes can occur. Below is one such example.
Let’s call the clients from this real-life example Bruce and Anne. Bruce has already retired and has an APB with $600,000 at 01/07/2017. Anne has $800,000 at the same date and decided to retire at 01/10/2017. So, after 1st October, they have only superannuation liabilities that are retirement phase superannuation income streams. The ATO clarified that sections 295-285(4) and (5) of the ITAA 1997 means that the assets supporting those income streams are deemed to be Segregated Current Pension Assets – even if this applies for only part of an income year. However, we could achieve Unsegregated for a full financial year by leaving $100 in an accumulation account. Would this have a considerably different tax outcome as compared to an Unsegregated/Segregated outcome? The answer is that it certainly can.
These actual clients had assets predominately in Australian equities and cash. They are the usual shares – NAB, CSR, RIO, Suncorp, Telstra etc. The table below shows the level of dividends received per quarter. The receipt of dividends is not uniform over the year.
The unsegregated for the first three months and then fully in pension mode would have the following tax on investment income:
Tax = Av Accum Liability x 0.15 x Assessable Income/Av Super Liability
= 800,000 x .15 x 41,305/1,400,000
If we left a small amount in accumulation for the full year the tax calculation would become:
Tax = 200,000 x .15 x 90,431/1,400,000
So, the administrative approach most would adopt has 83% higher tax than they need to pay.
In a former company, we totally changed the way actuarial support was provided to SMSFs. Starting with the 2017-18 actuarial certificates, we are going to do the same again. We are going to keep the number of actuarial client firms to a small number – less than 200 is the target. That will allow good personal contact and support. Our assistance will not be just at certificate preparation time, but over the whole year where thinking ahead allows a more advantageous outcome to be arranged. Currently, we are heavily involved with legacy pension and TBC support. We are also setting up (ahead of the end of the financial year) the computational models from last year’s certificates. That is having an additional beneficial outcome of highlighting funds that have the opportunity of arranging a better outcome for certain circumstances like those above.
Will this service and approach cost more? No. We have guaranteed the $132 inclusive of GST ($396 inclusive of GST for legacy pension adequacy reports) until 01/01/2020.
Would you like to be part of the 200 firms (all sized firms welcome) that we actively support? Then please give me a call on (03) 6224 1145 or send the following information by email to firstname.lastname@example.org
Approx. Number of Certificates required
Approx. Number of Legacy Pension funds
We seek no contract and you have total freedom in this regard. We are happy to retain clients by the diligence, usefulness and value for money of our services.