Tax effective strategies require forward planning

SMSF trustees and advisers need to have planned some tax minimisation strategies well in advance of the commencement of a pension, and also should allow any future change in member circumstances, a superannuation technical specialist has warned.

Addressing the situation of trustees wanting to separate the taxable component of their benefits from the tax-free component at the 2016 SMSF Association State Technical Conference, BT Financial Group head of financial literacy and advocacy Bryan Ashenden told delegates trying to do so immediately before starting a pension was the wrong time to undertake the task.

“You have to think about when you’re in accumulation phase and if everything is sitting in the one account, can you actually separate these components,” Ashenden said.

“And the answer is no you can’t. So to think about doing that immediately before you are going to start running a pension is actually the wrong time to be thinking about it in the first place.

“It is the case of saying if that’s something we want to achieve down the track just before you commence a pension is the wrong time because everything is done on a proportionate basis at that point in time.”

Ashenden said in order to achieve this goal SMSF trustees would have to look at setting up more than one super fund as the structure allows for multiple pensions but only one accumulation account.

Another tax effective strategy often asked about involved recontributions.

In regard to these activities, Ashenden advised the non-concessional contributions cap had to be taken into account particularly in light of the proposed new contributions limits.

“The issue that you have here is really what you are doing with a recontribution strategy is you are changing the underlying components of the future tax structure but you are not increasing the overall benefits,” he explained.

“You are just recycling the same money but using up your caps in doing so.”

Ashenden emphasised the potential impact on the contributions caps had to be considered in respect to recontribution strategies as advisers would want to avoid a situation in the future where trustees wanted to make further contributions but couldn’t as the cap had been exhausted due to one of these strategies.

Also during his session, Ashenden highlighted that a transition-to-retirement (TTR) strategy remained valid even if the budget measure to change its tax status became law.

It was proposed that from 1 July 2017, earnings on assets that support a TTR strategy would have the same tax treatment as funds in the accumulation phase and as a consequence, the value of TTRs was being questioned, he said.

But he cautioned against speculation that suggested the worth of a TTR strategy was only valid if its tax benefits remained, adding that this represented missed opportunities.

“Rather, consideration should be given to the many reasons why a TTR has been, and will remain a valid option for many members as they reach their preservation age,” he said.

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