SMSF members looking to use tax-effect accounting to reduce their total super balance (TSB) to avoid the proposed Division 296 impost will need to provide evidence as to how that strategy fits within their wider plans, an SMSF legal expert has highlighted.
DBA Lawyers special counsel Bryce Figot said tax-effect accounting, which adjusts financial statements to reflect actual tax liabilities associated with income, could be used by SMSFs when reporting their TSB, but may open trustees to questions regarding their intentions.
“When an SMSF enters into a pension, the provision for deferred income tax liability reduces, but the TSB increases. When an SMSF is in pension mode and then commutes the pension, the SMSF can recognise provision for deferred tax and decreasing the TSB,” Figot said in an online briefing last week.
“On balance, it would then be best to start tax-effect accounting after 1 July 2025.
“However, if you do start tax-effect accounting on or after 1 July, here’s a question you have to be able to answer: Does it appear the SMSF entered into or carried out the scheme with the sole or dominant purpose of getting a scheme benefit?
“I’m not using the language of Part IVA; I’m using the language of the promoter penalty regime.
“What’s a scheme benefit? I’m not talking Part IVA. I’m talking Taxation Administration Act, which states it is a reduction in a liability under an act which the commissioner has a general administration.
“You don’t want to be a promoter of a scheme and tax-effect accounting can play a role, but if you start using it for the first time on or after 1 July 2025, was your sole or dominant purpose to get a scheme benefit and you’re going to have to grapple with that difficult question.”
