SMSF trustees looking to sell an asset that has been segregated to a retirement income stream with the expectation of securing a large capital gain need to ensure the strategy is not a tax play but a documented strategy within the fund, according to an SMSF pension stream expert.
Accurium SMSF technical services manager Melanie Dunn said the strategy of segregating an asset to a retirement income stream in the year that it is then sold for a substantial capital gain was a grey area and could come under scrutiny from the ATO unless it had been planned in advance without an expectation of the gain.
Speaking as part of a webinar today on segregating assets for SMSF pensions, Dunn said this strategy was raised from time to time and was something to consider carefully.
She said the reason for this was “if you are realising material capital gains and have no other reason to segregate that property to the income stream other than to ensure the gain will be realised tax-free, then potentially the ATO will look closely at that”.
“You should have documented reasons for why you are employing the segregation and should have done that in advance and not in arrears of realising the capital gain,” she said.
She noted SMSF trustees have to act in the best interests of members and make decisions for their retirement, and would want to realise as much tax-free gain as possible.
“The cleanest way to approach this is to set up that situation as early as possible and that could be part of the fund’s investment strategy plan, that is, ‘I am setting this asset aside after I get the income and expense from it, and when I sell it, that will be from a retirement-based income stream,’” she said.
“That is a sensible strategy to have in your SMSF in line with the current rules, but there is that grey line around Part IVA and where that comes in. We have not heard of anyone captured under that, but if it was a significant capital gain and it was done at the last minute, it would give the ATO more cause to look at it.”
