Following the introduction of the $1.6 million transfer balance cap, many clients have asked whether it may be desirable to start a second SMSF to quarantine different benefit types and maximise their overall superannuation benefits. The Australian Taxation Office (ATO) has advised that it may not look kindly upon such arrangements. However, the ATO must treat each case on its merits.
Why consider such an arrangement? Most strategies centre on the principle of separating accumulation and pension benefits in order to maintain or grow the tax-free (pension) component in a separate fund. This makes sense if particular assets are expected to grow at a higher rate or generate more income than others. However, the ATO has the discretion to argue that Part IVA of the Income Tax Assessment Act (ITAA) applies in circumstances where a taxpayer has structured their affairs with the sole or primary purpose of avoiding tax, therefore there should be a greater objective at stake.
Administration costs and CGT
The total amount you can transfer to an income stream is capped at $1.6 million, although this amount can grow or decline in value without being assessed against the cap again (unless you make substitutions). Many retirees are keen to quarantine their high-yielding assets in this tax-free pension phase, and leave lower earning assets in the accumulation phase where income is taxed at 15%.
If you have an SMSF, generally earnings on your pension and accumulation accounts are assessed proportionately for tax purposes, which means you can’t allocate your higher-earning assets to the pension account and the lower-earning assets to your accumulation account. If you have two separate funds, different assets (and therefore their earnings) are segregated (for example, property in one fund and equities in another). However, you will have to pay two sets of administration costs, which could exceed the amount saved in tax payable on the different earnings.
If your fund is already fully or partly in pension phase, and you wish to set up another fund, not only would additional establishment and administration fees apply, but the sale or transfer of any assets from the existing fund to the new fund could create a capital gains tax (CGT) event. Capital gains in pension phase are generally tax-free, so this would be mostly relevant for accumulation interests. Stamp duty may be payable depending on the asset and the jurisdiction in which the transfer occurred.
Public offer funds
Many investors have a public offer fund in addition to their SMSF. This may be due to their employment arrangements, longstanding defined benefit schemes, or to retain insurance policies. While many individuals will roll these benefits into their SMSF at retirement, there may be incentives to retain these arrangements with a public offer fund, which will effectively quarantine the assets within this account. Others may consider establishing a new SMSF. While CGT and stamp duty issues are relevant only to the extent that they would apply in the public offer fund, the same considerations regarding purpose apply (i.e. the purpose is not the avoidance or minimisation of tax).
It should be noted that those SMSFs where no member has a balance greater than $1.6 million including in both accumulation and pension accounts can still use the segregated method if they wish, which would allow the allocation of different assets and their earnings to occur. In this scenario, holding all assets in pension phase is the most tax-effective option, although there may be other reasons for individuals to retain accumulation accounts. Additionally, public offer funds such as wrap accounts may not be subject to these accounting requirements and therefore segregation opportunities may be available.
If you wish to pursue a strategy of having two SMSFs, consider your objectives and the purpose for doing so in light of the ATO’s position. Some individuals may wish to have one fund with a spouse and another with children from a previous marriage or for the purpose of holding real property with business associates, others may wish to hold their assets in different funds for other reasons.
Whatever the objective, it is critical to seek advice given the ATO’s concern about the strategy, and the general costs and complexity of adding additional structures to your financial affairs.
Gemma Dale is Director, SMSF & Investor Behaviour at nabtrade, a sponsor of Cuffelinks. Any advice and information contained in this article has been prepared without taking into account your objectives, financial situation or needs.