The implementation of tax-effect accounting in an SMSF will not constitute a tax-avoidance measure under the Part IVA provisions of the Income Tax Assessment Act, a technical manager has said.
SuperConcepts SMSF specialist Anthony Cullen told delegates at the recent SMSF Professionals Day Digital 2020, co-hosted by selfmanagesuper and SuperConcepts: “Part IVA is about anti-avoidance and trying to avoid tax, so the first thing I would say in relation to tax-effect accounting is how would the ATO quantify that somebody is avoiding tax and to what level they are avoiding tax [by using tax-effect accounting].
“So that would be the first reason I’d say no that we wouldn’t have a Part IVA problem because [the ATO would] need to prove there is avoidance of tax and just using tax-effect accounting is not necessarily going to be enough for that to get over the line.”
Reinforcing this point, Cullen noted one of the main purposes of applying tax-effect accounting to an SMSF is to give members of the fund a better indication of their respective balances.
He suggested this is a particularly important exercise if a married couple make up the membership of an SMSF and they go through a divorce.
“In relation to divorce, [we] often see clients [say] ‘we’re separating, he’s got $1 million in the fund, she’s got $1 million in the fund, we want to know how to split it’. But if you’re not using tax-effect accounting, then yes it shows up as $1 million each, but if the court order says the wife is to take her $1 million out of the fund and you don’t take into account future tax liabilities on disposals, then you’re leaving that for the husband who remains in the fund [to absorb against his balance],” he explained.
However, he cautioned against displaying inconsistency when using this accounting method.
“I wouldn’t go to the extent of introducing it this year because it’s beneficial to me and not doing it next year because I don’t really need to worry about it, and then trying to [apply it] again in a couple of years’ time,” he said.
“If you are going to choose to do it, you’re going to want to be consistent with your approach from one year to the next.”
