The impending change in law to allow an SMSF to service a maximum number of six members rather than four could lead to a tax benefit stemming from the greater ability to fully use any tax or capital losses the fund may have accumulated over time, a technical specialist has said.
Accurium head of education Mark Ellem noted the retention and use of SMSF tax or capital losses in the future can be achieved by including individuals from different generations in the fund and the increase in the maximum members a fund is allowed to have, from four to six, may aid and even encourage this process or strategy.
“SMSFs are a special kind of trust and, importantly, they’re not subject to the rule against perpetuity. [It means] they can’t actually have an end date. They can go on and on and on from generation to generation,” Ellem said during his firm’s latest technical webinar.
“With the potential increase of the maximum number of members from four to six, then a step in the process of fund wind-up would be to review the potential for the next generation to come into the fund to take advantage of those available income tax and/or capital losses that they could then apply against assessable contributions and also the capital losses against future gains made on the sale of assets.”
According to Ellem, it is particularly important to take stock of any available tax losses an SMSF might have at its disposal if a member passes away or if both members have been in pension phase for a significant period of time, and as a result the life cycle of the fund looks to be coming to an end, as these tax benefits are not transferable.
“Once you wind up the SMSF, any tax losses, any capital losses that the fund may have had are lost forever. [In this situation the losses] are gone because the entity is wound up,” he noted.
“An SMSF is a single tax entity, it stands alone for tax purposes, and if it’s wound up, then those losses are lost.”
Legislation allowing an increase in the maximum number of members allowable in an SMSF is still pending, having recently been amended by the federal opposition.
