SMSF practitioners and trustees should be aware of schemes that manipulate exempt current pension income (ECPI) rules to avoid paying tax under the proposed Division 296 tax as these have probably already been identified by the ATO as tax avoidance.
Accurium principal Melanie Dunn said where SMSF members had a large balance in retirement, the fund was likely to have a disregarded small fund asset (DSFA), which applies when a member in retirement phase has a total superannuation balance (TSB) of more than $1.6 million.
Speaking at the SMSF Association Technical Summit 2024 in Sydney today, Dunn added in these cases the SMSF would have to use the proportionate method to calculate ECPI, but if there was no DFSA, it could use the segregated method, which could be more beneficial as capital gains on segregated pension assets are tax-free.
“Can we do that? Is there a way to get a fund that will be caught by Division 296 to be eligible to use the segregated method? At Accurium we thought ‘could we create a strategy where you would not fall under the DSFA rules?’ and we came up with a few,” she said.
“I’m not sure we really want most of them to see the light of day because we think they are probably a little bit suspicious from the ATO’s perspective in terms of some kind of scheme to avoid tax.
“However, as we approach 30 June 2026 and see the tax coming in and have people wanting to withdraw money, you might see some of these ideas being floated so be aware whether these are legitimate strategies you can use.”
She said the one strategy to be aware of involved separating balances between accumulation and pension phases to create a fund that is solely in retirement phase and can use the segregated method so assets that are sold are tax-free.
“So if you move accumulation assets to a separate fund, retain the assets you want in the pension fund, sell those assets tax-free, [and] you could then roll over all assets into one fund and take the money out of the accumulation,” she said.
“Yet we know the ATO doesn’t like people moving money and creating separate SMSFs solely for this purpose and will ask if is this a scheme to avoid tax and why are you doing this.”
She said another questionable strategy requires using the timing of the DSFA test, which applies when a fund moves into the pension phase for the first time, and if it did not have a TSB above $1.6 million at that time, the DSFA rules would not apply and the segregated method could be applied.
“In this case, the fund, not in pension phase, moves entirely into it and if it’s got $5 million, it will create an excess transfer balance. It sells the assets tax-free and resolves the excess by commuting the balance back to accumulation phase,” she said.
“Was that a scheme to avoid tax? Why did we knowingly exceed the TBC and create the deemed segregated period? That one’s probably iffy as well.
“So, technically, there are some things there that I would caution anyone in the room about when enacting any of these strategies.”
