SMSF members considering the sale of an asset after moving into pension phase may want to consider the timing of that action where they are liable for capital gains tax to take advantage of the exempt current pension income (ECPI) rules, according to an SMSF specialist.
SMSF Alliance practice principal David Busoli said SMSF practitioners and members may believe capital gains do not apply to an asset sale in pension phase, but noted the rules were more complex than that and considered when a member moved over from accumulation phase.
Busoli gave the example of an SMSF with two members where one has been wholly in pension phase since 1 July and the other in accumulation phase but intends to convert their whole balance to a pension from 1 January and after that sell some assets that will yield capital gains.
“Will those gains be assessable? The quick answer is no on the basis that 100 per cent of the SMSF will be in pension phase at that time, but is that correct?” he said.
“If all members of the fund are in pension phase for the whole of the year, then all of the fund’s income, including assessable capital gains, is ECPI and there is no tax to pay.
“If all the members are not in pension phase for [the first] half of the year, but 100 per cent in pension phase for the remaining half, then by applying the segregated method the income during the period when the SMSF was entirely in pension phase would be tax exempt while an actuarial certificate would be required to determine the tax payable for the first half of the year. As the gains are to be realised in the second half of the year, they would be exempt.”
However, he pointed out this method could only be applied where the segregated method could be used and if it could not, an actuarial certificate would have to be applied instead for the whole year, resulting in half of the income for that year being assessable, including half of the assessable capital gain.
“How do you know if you can use the segregated method? The SMSF cannot use the segregated method if any member has a total super balance of more than $1.6 million at the previous 30 June and a retirement-phase pension in any fund,” he added, noting it may be preferable in this circumstance to delay an action.
“If the SMSF cannot use the segregated method and the asset sales can be delayed to the following 1 July, then if the SMSF remains solely in pension for the whole year, the 100 per cent tax exemption will apply.
“Even if the fund subsequently includes an accumulation account, perhaps due to a contribution, the exempt actuarial percentage would still be much higher as the vast majority of the SMSF would have been in pension phase for whole year.”
