If you have over $1.6M in a superannuation pension, you are probably aware that last week the government passed legislation that will impact on you.
From 1 July 2017 you will only be allowed to transfer $1.6M into a tax free pension account. If you already have a pension account established that exceeds this amount, you will be required to transfer the excess funds back into an accumulation account, or alternatively you may withdraw them from super.
If you transfer the funds back into an accumulation account the earnings will once more be taxed at 15% (income) and 10% (eligible capital gains). If you withdraw the funds from super entirely and invest them in your own name, the income and capital gains will be taxed at your marginal tax rates. What is appropriate for you will depend on what other income you are receiving, and so what your overall tax position is likely to be. Some people will be better off holding the funds in super, while for others it will make more sense to invest in their own names.
One concern, particularly for people holding assets with a large capital gain is: what happens if I decide to sell the asset after 1 July 2017? There could be a significant difference in the net outcome if the entire gain is taxed. Take for instance a case I saw recently:
Some time ago, a client and their partner purchased an investment property in their self-managed super fund for $6,000,000. It has increased in value quite significantly, to the point that it is now worth $14,000,000 and is generating rental income of $910,000 p.a. Under the current rules, the entire asset is held in pension accounts so there is no tax payable on the rental income or on the capital gains if sold. What happens after 1/7/2017 though, when the majority of the asset would need to be transferred back into an accumulation account?
From 1/7/2017 $3,200,000 (22.86%) will be held in tax free pension accounts ($1.6M each), and the balance will be held in taxable accounts. The rental income will apportioned between the taxable and tax free accounts on a pro-rata basis, the end result being that 22.86% will remain tax free, while the balance will be taxable (resulting in a tax liability of $105,296). This equates to an effective tax rate of 11.57% across all of the income, so still pretty good.
But what happens if the property is now sold?
The answer depends on what the trustees have done between now and 30/06/2017.
Many trustees will not be aware there is an issue or an opportunity, and so won’t do anything. What this means is that the growth received on the property will be partly tax free and partly taxable. Given there is a gain of $8,000,000 on this property, tax will have a significant impact on how much they walk away with.
If the trustees have done nothing then 77.14% of the gain will be taxable, resulting in a tax liability of $617,120.
However, the trustees will have the option of resetting the cost base of the asset prior to 30 June next year. What this would mean is that the current value of $14,000,000 would count as the cost for tax purposes rather than the actual purchase price.
In this case if the property was subsequently sold for this price there would be no tax payable on the gain – a saving of $617,120.
It is important to note that there will be intense scrutiny by Auditors and the Tax Office of the process undertaken to determine a value of the asset, and that the trustees must make an election in the approved form (note that this form is not yet available).
If you have any questions in relation to this please contact me.
General Advice Warning
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Taxation, legal and other matters referred to on this website are of a general nature only and are based on Consultum’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.