Switching up your SMSF for income

-- | 08/11/2018

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Glenn Freeman: I'm here on the sidelines of the Morningstar Individual Investor Conference 2018, with the Head of Technical from SMSF Association, Peter Hogan.

Peter, thanks for joining us today.

Peter Hogan: Pleasure. Thank you.

Freeman: Now, in your session today, you're talking about some of the complexities that people need to be aware of in transitioning from the accumulation or building up the size of their self-managed super fund and transferring through to the pension or the drawdown phase.

Hogan: Yeah. I think many of the benefits of moving from accumulation to pension phase in self-managed super funds are still layering, and perhaps we have lost sight of those benefits because we've been worrying about more complex rules around transfer balance cap and so on.

So, it was worthwhile, I think, emphasizing today that, for example, that you can still invest capital against tax very effectively in your self-managed super fund, provided that when you acquire assets in the buildup phase that you don't dispose of those assets until you are in pension phase.

Now, how much tax you may or may not pay when you sell those assets will now depend to a large extent on the size of your account balance and so on. And the calculation of the exempt income for a fund that has both pension accounts and accumulation accounts is far more complicated. And so, I guess, there is an added degree of complication that we've now got, but those benefits are still layering. I think it's worthwhile reminding everyone that those benefits are still there.

Freeman: So, in addition to the taxation complexities, what are some of the other things that people need to be aware of and when? So, how soon in the piece, do they need to actually start thinking about these things?

Hogan: Yeah. Well, it is important that you actually start the pension properly. And I think this is something that is overlooked a little. And while it's a bit of music, in the sense it sounds a little schizophrenic, I mean, it's important that the right sort of paperwork is in place. So, the reason it sounds a little loud in the self-managed super fund space, of course, is that the trustee and the member who is starting the pension are often the same person. And so, you're almost writing to yourself, saying I want to start a pension, these are the terms and conditions, this is how much I want to pay myself, here is my tax fund number, here is my bank account details.

Freeman: So, these are the documents that you need to send through to the ITO?

Hogan: No. No. These are the documents you need to keep on record of the fund, but they need to be there to establish that the fund has actually started. As trustee, you have an obligation there to also formally recall the fact that you've received those – that request from the member; could be yourself, yeah, and that you're happy that they've satisfied the condition of release, that the trust aid allows sort of the pension to be paid, that all the terms and conditions are acceptable. And then you have to confirm that as part of that process.

And this is sort of a thing if you think about it, if you done that with a public offer fund, that's the process you would go through with that third-party provider. So, you have to do exactly the same thing in the self-managed super fund space as well. And, of course, we have the added requirement now, of course, that you have to value the assets as of the date that the pension starts and report that under the transfer balance cap reporting regime to the Tax Office as well. So, any pension started from 1 July, 2017 onwards must also be reported to the ITO.

If you may need to report that in the quarter in which the pension started or annually depending upon whether any – a member of the fund had a total super-balance of more than $1 million at 1 July, 2017, in which they must report it quarterly. If any – no members of the fund had a total super-balance of $1 million or in super, then they can still report it on when they launch their annual return.

Freeman: Sure. And just lastly, are these things – these requirements that are actually influx, is it some – potentially going to be some change if we do have a different government, say, in sometime next year, could it be changed again?

Hogan: I think that while the Labor Party, initially when these current changes that came in from 1 July, 2017 had a different way of dealing with large superannuation accounts in terms of other than the transfer balance cap. I think that they appear at this stage to accept that that's the regime we have at the moment. Certainly, the biggest area of difference between the two at the moment is the refund of franking credits.

Freeman: Sure.

Hogan: Clearly, for people in pension phase, where there is no tax on certain levels of income, there's more likely or potentially more likely to be unused franking credits, where currently they'll get a cash refund of those unused franking credits. And the Labor Party has strongly confirmed and endorsed their view that if elected that they would change that and remove that refund of franking credits. That's predominantly the difference. So, I think, otherwise the reporting regime, that $1.6 million cap regime is likely to stay in place.

Freeman: Yeah. So, obviously, that dividend imputation sounds like it's something where everyone's watching pretty closely to see what's going to happen with that.

Hogan: Yes. Indeed.

Freeman: Great. Excellent. Thank you very much for your time today, Peter.

Hogan: Pleasure. Thank You.

This report appeared on www.morningstar.com.au 2022 Morningstar Australasia Pty Limited

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