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Important notice: Any advice and information in this publication is of a general nature only. Any general tax information provided in this publication is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of an individual’s liabilities, obligations or claim entitlements that arises, or could arise, under taxation law, and we recommend that you consult a registered tax agent. nabtrade is not a registered tax agent.
Following the introduction of the $1.6 million transfer balance cap (TBC) many clients have asked whether it may be desirable to start a second self managed superannuation fund (SMSF), in order 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 each case must be taken on its merits.
So why would one 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 logical 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.
The total amount you can transfer to an income stream is capped at $1.6m – although this amount can grow or decline in value without being assessed against the cap again (unless you make commutations). 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 (e.g. property in one fund and equities in another), however, you will have to pay two sets of administration costs, which could easily 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 would 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.
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(s). 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 $1.6m 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. Obviously 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 business real property with associates; others may wish to hold their assets in different funds for other reasons. Whatever your objective, it is critical to seek advice in this area, bearing in mind the ATO’s concern about the strategy, and the general costs and complexity of adding additional structures to your financial affairs.