ATO clamps down on self-managed super funds in bid to stamp out tax avoidance

The Australian Taxation Office plans to clamp down on self-managed super fund trustees who move their assets around before selling them to avoid capital gains tax.

In a draft ruling issued last week, and open for public comment until September 4, the ATO said that from July 2014, SMSF trustees will have to obtain an actuarial certificate to claim the pension income-tax exemption, or entirely segregate their SMSF fund assets into those that are in the accumulation phase and those that bear liability for their current pension.

Failure to do so could result in the ATO pursuing them under tax avoidance provisions.

Currently, SMSF assets used to pay out pensions are tax-exempt, whereas assets that don’t currently have any pension liability still incur capital gains tax.

The ATO also flagged its concern about trustees moving assets from the accumulation to the pension stage before selling them to avoid capital gains tax.

“If an asset is purported to be segregated [i.e. claimed to be in the pension phase and thus tax-exempt] shortly before disposal, and then disposed of in circumstances where a capital gain is claimed to be exempt income, it will be a question of…whether it was invested or otherwise being dealt with for the sole purpose of enabling the fund to discharge liabilities in respect of superannuation income stream benefits,” the ATO’s draft ruling stated.

The ruling will have broad implications, as most self-managed super funds both distribute pensions and accumulate superannuation, AMP SMSF head of policy and technical Peter Burgess told SmartCompany. This can be for multiple members or for the same member if they are still working past the age where they get access to their super.

“What the ATO talked about is if you want your fund to be treated as a segregated fund, you have to ensure that your assets are entirely segregated,” he says.

“They used examples where you could have a property within a self-managed super fund and say a certain proportion of that property is tax-exempt as it’s in the pension stage and the rest is within the accumulation stage, and try to treat the fund as segregated.

“The ATO says they don’t think that suffices. You need to make sure that if it’s a property, it either sits entirely within the pension pool, or you treat it as an unsegregated fund, in which case you need an actuarial certificate to determine which parts are tax exempt and which parts are not. None of this business where you say it’s segregated when it’s not to avoid the cost of an actuarial certificate.”

The ATO is obviously also concerned about individuals wanting to use the tax-free provisions surrounding pension assets to avoid capital gains tax, Burgess says, “which they would do by transferring an asset from the accumulation part of the portfolio to the pension part and then selling it shortly after”.

However, Burgess said the ATO did not define what “shortly after” meant, and so it remains unclear how long an asset must be held so as to not flag alarm bells with the taxman.

Aside from property, other assets likely to be affected by the change are things like joint bank accounts.