If you are near retirement you will know about the $1.6m transfer balance. It is the amount of money a person can put into their pension phase and enjoy tax-free earnings later on.
Cosimo and Agathe live in Perth, they are over 60 and contemplating retirement. They have $1.5m and $1.4m in their superannuation fund.
As their superannuation balances are less than $1.6m they can put the whole of their monies into pension phase of their superannuation fund and enjoy all of the future superannuation fund earnings tax-free.
The $1.6m threshold is critically important. Even if the assets increase beyond $1.6m later on – the entire initial portion of the monies transferred to pension phase is still tax-free.
So given the tax-free nature of the $1.6m: many Perth locals are asking “how do I get my superannuation balance under $1.6m”.
We have a few strategies
Strategy 1 – adopt tax effect accounting
Many self-managed superannuation funds recognise income tax as it is incurred. However, all of the large superannuation funds will recognise the inbuilt tax liability associated with unrealised capital gains.
This is where tax effect accounting comes into play. Tax effect accounting is a system to recognise future tax liabilities as part of the current SMSF financial position.
The Jones Superannuation Fund only has one asset worth $1.7m. However, if the asset was sold later on the tax liability on the sale of the asset would be $100k. So the net value of the fund is $1.6m.
Basically, the purpose of tax effect accounting is to reflect the “true balance” of a members superannuation interest. And it classically reduces the value of a members fund balance. This is important as a members superannuation balance reflects the market value of the superannuation funds assets if the member chose to withdraw their superannuation monies from the fund (and trigger the tax liability).
So by adopting tax effective accounting, you can potentially reduce the value of the SMSF assets (and then the individual member interests) which might then allow further assets to be included in the $1.6m threshold.
The adoption of tax effect accounting should be done consistently and a “one-off” change simply to get more monies into the SMSF should be looked at carefully.
Strategy 2 – spouse splitting
It is not common for a couple to have different superannuation fund balances. And sadly the $1.6m threshold for a person is not a combined threshold of $3.2m.
So a couple can have a total superannuation balance of $3.2m and be prejudiced by the $1.6m TBAR threshold.
Cosimo and Agathe live in Perth, they are over 60 and contemplating retirement. They have $2.0m and $1.0m in their superannuation fund.
As Cosimo’s superannuation balance exceeds $1.6m he will have to put $400k into his accumulation fund and his Perth accountant will record an income tax liability on that money (at 15%).
As part of their progressive tax strategy over the years, a person with a higher superannuation interest can look at “splitting” their contributions to the person with a lower superannuation interest. This tax strategy can be found in Div 6.7 of SISR and it allows a person to allocate the lessor of:
85% of the concessional contributions made during the year, and
The concessional contributions cap.
The following example illustrates the tax strategy
Cosimo meets his accountant in the Perth CBD for a tax strategy meeting. And on seeing the disparate superannuation balances and the tax impact of the monies in pension phase they decide to come up with a strategy to increase Agathe’s superannuation balance over time.
During the 2018 financial year, Cosimo contributed $25,000 to his SMSF. So he chose to spouse split $21,250 to his wife Agathe. This has effectively then meant that Agathe’s superannuation balance, which is low to get in under the $1.6m threshold.
A note on tax strategies
Of course, every tax strategy cannot be done simply to enjoy a tax advantage. If a person enters into a transaction with the sole or dominating purpose of enjoying a tax benefit then the government can simply deny the benefit obtained. So a professional tax advisor is critical in getting clarity.
Investment advice is critical
Further, the adoption of a tax strategy, asset protection or estate planning strategy should not be done without considering the wider picture. When you are looking at taxation, asset protection and estate planning: the investment profile, risk and returns should be considered (and possibly life insurance). So a financial planner/broker licensed by ASIC should be engaged for the investment advice associated with the overall strategy.
What is certain is that legacy planning for a family will almost always include a consideration of taxation structuring within a superannuation fund environment. And when undertaking such a review it is critical to engage an independent, impartial and qualified advisor who deeply understands business families. Because the succession and legacy planning for a family goes deep into the conversations that families have and their future structuring.
This is why Westcourt only focuses on Perth family businesses. And we are passionate about collaborating with investment advisors, insurance brokers, real estate agents and finance brokers so our clients enjoy a co-ordinated, and independent, approach to maximising the wealth and legacy building for a family business.