With the introduction of the Transfer Balance Cap, some SMSF members were required to move assets from their retirement pension account to their accumulation account to ensure their pension account did not exceed $1.6 million on 1 July 2017.
Other superannuation changes have also meant that if an SMSF member has a total superannuation balance of $1.6 million across all of their superannuation funds, and the member is in receipt of a retirement pension, then their SMSF can only calculate the income tax exemption using the unsegregated method.
Where is best to hold pension assets?
Some SMSF members wonder if it is worth establishing a second SMSF where they hold pension assets in their existing SMSF and accumulation account assets in the second SMSF.
There are some good reasons to have two SMSFs. One SMSF could be used to retain higher-yielding investments in the tax-free pension fund and lower-yielding investments in the tax payable accumulation fund. It may assist the member’s pension balance to grow faster than their accumulation account due to the growth of assets in the pension fund.
On the other hand, if all assets were in the one SMSF, then the investment earnings need to be allocated in proportion to the member’s pension and accumulation account balances. Also, in the event a liability arose from an investment in one SMSF, the assets in the other SMSF would not be exposed or affected.
Assets in the two SMSFs can be segregated for investment reasons where different strategies are developed for members with different risk profiles. This is especially useful if the SMSF members are of different ages and at different stages of their lives. As the number of members in an SMSF is limited to four, having two or more SMSFs will also allow larger families to have their children included in the SMSF environment.
It may also assist in asset protection in the event any family member is exposed to a separation claim due to a relationship breakdown.
Some members may establish a second SMSF so that they can have different death benefit nominations in each SMSF, as well as the control of each SMSF left to different people. This may avoid situations where a death benefit is left for one person but the control of the SMSF is passed to a different person, which may result in the controlling person being tempted to ignore the wishes of the deceased member when allocating the death benefit. Members will need to ensure appropriate death benefit nominations are put in place especially with reversionary pensions.
Doing it for the right reasons
There is nothing stopping someone from establishing a second SMSF and doing so on its own would not be a concern to the Tax Office. This is especially so if there are genuine commercial or family reasons for doing so. However, the ATO would be concerned if the member of the SMSFs started manipulating assets between the two SMSFs or switching each of the SMSFs between accumulation phase and retirement phase.
The downside of having two SMSFs is of course the additional administration costs and the initial process of transferring selected assets from the existing SMSF to a newly-established SMSF. Members need to document transactions with care so that there is no confusion as to which assets belong to which SMSF.
Moving assets between the two SMSFs will result in a capital gains tax event with the appropriate tax treatment. Stamp duty may also apply. Members need to consider 'related party' rules when transferring assets between SMSFs as only listed securities and business real property can be transferred between related parties.
Anyone that is considering establishing a second SMSF should discuss their situation with a licensed financial planner who specialises in the superannuation law. It is a costly strategy and it doubles your compliance obligations so it’s not something members should enter into lightly.
(Editor footnote: One reason to consider retaining a single large SMSF is that if Labor's franking credits proposal is adopted, an SMSF might have tax payable on the accumulation assets to use the franking credits generated by the whole fund, including the pension assets. If assets are separated into a pension SMSF, franking credits may be lost in future).
Monica Rule is an SMSF specialist and author. Her advice is general in nature and you should seek advice that relates to your specific circumstances before making any decisions. www.monicarule.com.au
For anyone working with SMSF clients, Monica will be speaking at a webinar hosted by the Institute of Public Accountants on Building a Nest Egg in a Self-Managed Superannuation Fund, on 16 May 2019.