Should you open a second super fund?
ANDREW Heaven, an AMP financial planner at WealthPartners Financial Solutions, discusses opening a second superannuation fund when yours tops $1.6m.
Question: I have read a commentary suggesting that SMSF's which exceed the $1.6m super limit should consider opening a second SMSF. What would be the benefit of such a strategy?
Answer: July 1, 2017 marks the introduction of $1.6 million limit on the amount of superannuation savings that can be transferred into an income stream to receive the tax exemption on investment earnings and capital gains.
This should not be confused with the general transfer balance cap of $1.6 million which also comes into effect from July 1, 2017. For people with a total superannuation balance greater than or equal to the general transfer balance cap of $1.6 million, they will be unable to make any further Non-concessional Superannuation contributions.
Opening a second SMSF will not assist with avoiding the general transfer balance cap of $1.6 million as it operates on a total superannuation balance across all superannuation funds.
For Self-Managed Super Fund members who have superannuation savings in excess of the $1.6 million limit, the tax exemption on investment earnings will be reduced as the assets of the fund will be required to be unsegregated. This means earnings on the assets of the fund are proportioned between the tax-exempt portion within the income stream and the taxable portion with the Superannuation fund in accumulation phase. Should an asset be sold (such as a property), only a portion of the capital gain will be tax-free, not the whole amount.
SMSF members considering opening a second SMSF would be doing so presumably for taxation reasons. This strategy would allow the accumulation and pension phases to be held in separate SMSF's. This separation means $1.6 million would be contained within an income stream within a SMSF and all excess funds above the $1.6 million limit would be contained in another SMSF. Thereby theoretically negating the change in rules around segregation of assets.
The advantage of this strategy is being able to dispose of assets held within the income stream SMSF with no capital gains tax. Furthermore, if the asset increases in value once the income stream has been commenced, again no capital gains tax on disposal.
By way of an example of how this strategy may be applied. John (age 62 and retired) and Julie (age 64 and retired) each commence a pension within their original SMSF for $1.59 million as at August 1, 2017. In October 2017, they transfer any remaining member balances to another SMSF. They also decide to retain the existing investment property within the original SMSF.
The property was originally purchased in 2009 for $720,000 and was valued at $1.02 million at August 1, 2017 when commencing the pensions. Due to a surge in the property market in early 2018, the valued increased to $1.35 million. John and Julie can sell the property and no capital gains tax will apply.
Prior to July 1, 2017, a SMSF could achieve this outcome within one fund using the segregated pension method. The change in the legislation has removed the segregated pension method, therefore creating interest in the strategy of having two SMSF's.
A word of warning. The Australian Tax Office has flagged the potential for this strategy to be considered a tax avoidance measure under Part IVA of the Income Tax Assessment Act. Part IVA of the Income Tax Act is the general anti-avoidance rule for income tax. It protects the integrity of the system as a "catch all" rule that ensures that arrangements that have been contrived for the purpose of obtaining tax benefits will fail.
A dual SMSF strategy cannot be done purely for taxation reasons. Other reasons need to exist such as estate planning, investment opportunities or complying with the maximum number of members which is 4 or less. It is very important to seek advice and document any reasons as to why a second SMSF is appropriate.
Q&A with The Coach story first appeared on the WealthParners website. Any general advice in this story doesn't take account of your personal objectives, financial situation and needs. For more information from WealthPartners, go to www.wealthpartners.net.au.