Waiting for the indexation of the general transfer balance cap in July to start a pension may not be suitable for SMSF members staring down a large tax bill before the end of the financial year.
SMSF members waiting until the increase in the general transfer balance cap (TBC) in July before starting a pension may be better off taking action now if they have any past or future capital gains tax (CGT) events occurring during the current financial year, a technical specialist has stated.
Smarter SMSF education and technical manager Tim Miller said the indexation of the general TBC, in this case from $1.9 million to $2 million on 1 July, usually raises questions about deferring the commencement of a pension until the new financial year, but tax offsets may be a more pressing issue to examine.
“For those who are sitting at about $1.9 million or just over that figure, should they be looking at commencing a pension now or after the first of July when the cap goes up to $2 million?” Miller said during a webinar hosted by SuperGuardian yesterday.
“One of the things we should consider is the CGT point of view and is there an event which has occurred this year where the fund would benefit by applying a proportion of exempt current pension income (ECPI) based on a late-year commencement of a pension.
“It will mean a smaller ECPI deduction under the pooled investment approach, but that is then applicable to the income across the entirety of the year.
“By starting a pension, say on 1 April, you are getting three months out of 12 and getting a quarter of the income being exempt with the fund and then you can apply that across the entire year to offset the CGT event that’s occurred earlier in the year.”
He said this type of planning could be overlayed with the rules regarding disregarded small fund assets (DSFA), which would also provide an opportunity for pension-based tax planning.
“Since it is year one of the pension the DSFA rules state that if you’re the first pension member in the fund, then in year one you can always segregate the pension.
The reason for this is the way those rules work are because they are backward looking to see if you had [a total super balance] of more than $1.6 million in the previous year, and were in receipt of a retirement phase income stream anywhere, not just in the self managed super fund. If the answer to those questions is no, then you don’t have DSFA, which means you can segregate.
“It might be short-lived because when you get to the end of this year and have more than $1.6 million, you will not be entitled to segregate next year, but it could be critical if you have an asset that you are planning to sell that has a large capital gain that could be segregated in this financial year and having that tax element offset.
“Anyone that is in a position with a requirement to sell may be better off starting a pension now to save on the tax liability for the sake of having an additional $100,000 in pension later.”
