More segregated accounts are likely to emerge as a result of the federal budget’s $1.6 million transfer balance cap, as many SMSFs will want to have control over whether their assets are placed into the accumulation account or pension account.
On 3 May, the government announced it would introduce a $1.6 million cap to the amount transferred from the accumulation phase into the pension phase, assessed at the time of the transfer.
Any portion above the $1.6 million either needs to be taken out of the fund or transferred to an accumulation account, with a deadline of 1 July 2017 for pension balances to fall below the threshold.
SuperConcepts technical services and education general manager Peter Burgess said in the SMSF world there were two ways to tackle that.
“Clients can keep it in the one pool of money so that it essentially becomes an unsegregated account, but an actuarial certificate will be required to determine the earnings that relate to that portion of the fund because they’re taxable at 15 per cent,” Burgess told the SuperConcepts SMSF in Practice day in Sydney last week.
“The other option is to physically segregate the fund, where you have an accumulation account and a pension account.
“I think going forward we’re likely to see a greater focus on segregated accounts – some clients will want to take this option because they’ll want to be specific about what assets they want to hold in each pool.
“Where you’re setting up or have a segregated fund, [there will be] decisions about which assets you’re going to have in each pool.”
He added the fund’s tax-free and taxable components were also a key discussion point.
However, he also emphasised it might not always be possible to have a segregated fund.
“Because what we do know, by virtue of the ATO and the determinations they issued a couple of years ago, is that you can’t segregate a property – in a segregated fund, if there’s a property in there we can’t say some of that is in the pension phase and some of it is in the accumulation phase,” he said.
“It’s either got to be one or the other because you simply can’t divide up the asset.
“So if you have an SMSF with lumpy assets, you may have no choice but to have an unsegregated fund, otherwise sell that property in order to get it out of the fund and then go down the segregated path.”
From a systems point of view, segregation would be an interesting development for the SMSF sector, he said.
“Because a lot of software systems don’t handle segregation and segregated assets particularly well, this is going to be a bit of an issue as to how the software systems handle these sorts of structures,” he explained.
The issue of the $1.6 million transfer balance cap also raises concerns about record-keeping.
“This, you would think, would require the ATO to have to start recording pension balances because at the moment they don’t ask for it as part of the reporting process,” Burgess said.
“We have to report contributions but we don’t report what people have in their pension balances, and you’d think going forward they’d have to do that in order to keep tabs on the $1.6 million [transfer balance cap].
“Another issue is what about our clients who have more than one pension in two different funds that don’t know about each other, which fund is going to have to start paying tax on its earnings?”
He said it would be assumed it would be up to the ATO to notify one of the funds that the earnings on a certain proportion of those assets were going to be subject to tax.
“But that’s missing,” he said.
“These are the types of issues that will come up during the consultation phase – how, from a practical sense, are they going to make these things work?”