With the recent regulatory change, SMSF returns for the 2016/17 financial year include a few twists and turns which may mean lodgement takes longer than previous years. Graeme Colley highlights the key requirements for trustees in this article.
Do you often leave everything to the last minute and end up in a mad panic? How about sorting out the regulatory returns for your SMSF, same thing? If so, read on, as the returns for the 2016/17 financial year include a few twists and turns which could end up with a delay to get them in on time.
The super changes from 1 July last year mean that SMSF members with a pension balance of more than $1.6 million may need to consider reducing any excess, resetting CGT cost bases, and getting actuarial certificates. This is in addition to the usual issues such as calculating taxable income and what expenses are deductible for the SMSF.
With all these changes, thank goodness the ATO has allowed an extension to lodge returns to 2 July. But that’s no excuse for being tardy as the ATO recognise this year is a bit of an exception with more effort being required to complete SMSF returns.
The $1.6 million Transfer Balance Cap
If you have a total balance of more than $1.6 million in pension phase as at 30 June 2017 in all of your super funds, and you did not reduce it to no more than $1.6 million by 1 July 2017, a penalty will apply. The excess could have either been transferred to accumulation phase or withdrawn as a lump sum. For anyone in receipt of a defined benefit pension with a value of more than $1.6 million, or a combination of defined benefit and account-based pension over that amount, an adjustment of all account-based pensions will be required. Any adjustment for these purposes can allow access to CGT relief but there are exceptions.
Where a pensioner has reduced the balance of their account-based pension because of the introduction of the $1.6 million Transfer Balance Cap, or they are in receipt of a transition to retirement pension (TRIS), they may have access to the transitional CGT cost base reset. The reset allows a fund to notionally sell the CGT asset at its market price and immediately notionally acquire it to reset the cost base for CGT purposes. The operation of the reset depends on whether the fund calculates its exempt and taxable income on a segregated or proportional basis. If the segregated basis is used, it is possible for the CGT asset to reset its cost base between 9 November 2016 and 30 June 2017. If the proportional basis is used, the market value on 30 June 2017 is used to reset the cost base.
Why would you reset the CGT cost base of the fund?
The answer lies in the potential tax benefits. It’s not compulsory to reset the CGT cost base if you qualify and sometimes, it may be better not to. Don’t forget the reset is available only if the amount you have in pension phase on 30 June 2017 was more than $1.6 million or you were receiving a TRIS at that time.
If you decide to reset the CGT cost base of an asset an election must be made and information is required about the amount of the reset that is deferred at sections 8F and 8G of the fund’s Capital Gains Tax Schedule. Once the election is made it’s irrevocable which means it’s set in concrete.
Obtaining an actuarial certificate
One important aspect of lodging returns is the requirement for you to obtain an actuarial certificate. The certificate is required during the 2016/17 financial year if the fund calculated its exempt pension income on a proportional basis. An actuarial certificate is not required if the fund used the segregated basis or the fund was wholly in pension phase throughout the financial year. For the 2017/18 financial year, an actuarial certificate will also be required for all SMSFs where at least one fund member has a total superannuation balance of at least $1.6 million as at 30 June in the previous financial year.
Contributions and tax deductions
Keeping track of contributions made to the fund is something trustees need to do. You should classify all contributions on the basis of their taxation and preservation status. If you decide to claim a tax deduction for personal contributions, you will need to complete an election. It needs to be given to the fund by the later of the time your tax return is lodged with the ATO or by the end of the financial year after the contribution has been made. As trustee, you will be required to acknowledge receipt of the election.
Tax deductions for expenses paid by SMSFs are contingent on a number of situations, depending on whether the expense has been incurred in gaining the fund’s assessable income. This means that any expenses that relate to exempt current pension income are not deductible, as they are incurred in gaining the exempt income of the fund. A fund that has accumulation and pension members will apportion expenses between those that are deductible and those that are not. There are some expenses which can be claimed in full whether they are linked to exempt or assessable income of the fund. These expenses include the ATO’s supervisory levy and premiums for death and disability cover.
So, if you haven’t got to work on this year’s SMSF return, it’s certainly time to start now in view of the changes to super that have taken place.
Don’t forget to:
- Make an adjustment if the total of your pension balances are impacted by the Transfer Balance Cap,
- Reset the CGT cost base if appropriate,
- Arrange for an actuarial certificate if required, and
- Make sure contributions are correctly classified, income is properly accounted for, and deductions are correctly classified.
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.