Consider how the structure of your SMSF could affect CGT liabilities

September 22nd, 2010 | Accounting News, Consumer News, Financial Planning News, Tax Advice and Updates

A Self Managed Super Fund (SMSF) needs to be well structured, particularly with regards to its long term future.  Whilst, passing on a SMSF is not something people generally like to think about, it is important that trustees and advisors are careful when preparing pension documents for people who are moving from accumulation phase to pension phase.  This is because when the time comes and a person in pension phase dies, assets will generally be sold to pay a lump sum to dependants.  The capital generated from the sale of these assets will likely become subject to Capital Gains Tax (CGT) and it is for this reason that your SMSF planning should also take your family and other beneficiaries into consideration.

The payment of CGT will depend on the individual situation of the deceased person.  Things such as superannuation interest and whether or not the person has died in accumulation or in pension phase will affect the outcome in each case.

Accumulation phase
Upon passing away in accumulation phase, the deceased’s SMSF may have to sell assets to pay a death benefit to the dependants and there may be CGT obligations.  Assets are also able to be transferred to the dependants, instead of being sold and cash being given. This is treated the same as if the SMSF has sold the asset to an outsider and Capital Gains Tax cannot be avoided.

Once the dependants have received the death benefit, CGT will be paid depending on the component of the payment (taxable or tax free) and if they are death benefit dependants or not.

Pension Phase
Any asset that provides income to a person in pension phase is exempt from any tax or CGT.  However, if the Self Managed Super Fund owner dies at this stage, their assets will then cease to become exempt from taxes on their date of death.  These assets are then classed the same as accumulation phase assets and will possibly become subject to CGT when being sold or transferred.

If the SMSF has a reserving policy and a lump sum is being paid to a dependant, the trustee is able to pay the amount of the deceased’s superannuation interest as well as the contribution tax paid by the deceased from a reserve account.  This payment is called anti-detriment payment.

An anti-detriment payment can allow the SMSF to claim a huge expense for the fund and carry forward this loss for the life of the fund. This loss can create a tax shelter for contributions from young members of the fund for future years.

How can a SMSF avoid paying CGT upon death of a pension member?
Assets that contribute to paying a pension can continue to be generating an income stream when those assets are considered to be in “pension phase”.  In order to do this, and to avoid CGT liabilities in the future, the income stream should be designed so that it is reverted to a death benefits dependant upon the death of the pensioner.  What this implies is that the income stream never stops and payment is transferred to the death benefit dependant.  It is important to be aware that adult children over the age of 18 and not studying (unless disabled) are not death benefits dependants, and as such the pension cannot be reverted to them.  For adult children that are studying the age limit to receive a reversionary pension is 25.

When creating pension documentation and planning the future of your Self Managed Super Fund, it is important to take potential future CGT obligations into account.  This can help to make an already upsetting time less stressful, complicated and costly for those involved.

Here at The Quinn Group our experienced team of Financial Planners, Accountants and Lawyers can provide you with the total solution and assist you with all your Self Managed Super Fund and Capital Gains Tax related queries.  For advice about whether a Self Managed Superannuation Fund is right for you and to get the best chance at the lifestyle you want, contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.

The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.