Self-managed superannuation client case study
When increasing asset values within an SMSF are not matched by cash flow, meeting minimum pension requirements can become increasingly difficult.
This case study shows how careful planning helped an ageing couple retain a significant investment, substantially reduce a potential CGT liability and simplify their financial affairs.
Key points
- Both members were aged over 80 and wanted to retain a significant SMSF investment rather than sell it.
- Rising asset values without corresponding cash flow were making it difficult to meet annual minimum pension payments.
- Transferring the investment from the SMSF in a single transaction was estimated to result in approximately $175,000 in capital gains tax (CGT).
- Allan Hall Superannuation developed a staged in specie transfer strategy designed to increase the fund’s exempt current pension income (ECPI) from approximately 65% to close to 100%.
- The resulting CGT payable was less than $5,000.
- The strategy also addressed significant potential future death benefits tax liabilities and simplified the clients’ overall financial structure.
Background
Our clients, a couple both aged over 80, held investments within their SMSF that had increased significantly in value without a corresponding increase in cash flow.
This created difficulties in meeting the fund’s required annual minimum pension payments. At the time, the SMSF’s exempt current pension income (ECPI) was approximately 65%.
Our clients wanted to retain the underlying asset rather than sell it, so we considered the tax implications of transferring ownership to them personally or to an associated entity.
The challenge: transferring the SMSF asset without triggering significant CGT
An in specie transfer was identified as the preferred solution. However, transferring the asset in a single transaction would have realised a substantial capital gain within the accumulation component of the SMSF. The estimated CGT liability was approximately $175,000.
As the investment comprised units in a property unit trust, Allan Hall Superannuation developed a staged in specie transfer strategy designed to optimise the fund’s ECPI and reduce the CGT liability to close to zero.
How the staged in specie transfer strategy worked
The strategy involved several carefully timed steps:
- Transfer the accumulation balance: One parcel of units, representing the value of the member’s accumulation balance, was transferred as close as possible to 1 July. The in specie transfer was accounted for as a lump sum benefit payment. Completing this at the beginning of the financial year meant the fund was then entirely in the retirement pension phase for the remainder of the year, increasing its ECPI to close to 100%.
- Pay the required minimum pensions: Pro-rated minimum pension amounts were withdrawn from each member’s pension account at a specified date following the first transfer.
- Transfer most of the first member’s pension balance: A second parcel of units, representing approximately 98% of one member’s pension account balance, was transferred in specie. This was accounted for as a partial commutation of the pension followed by a lump sum benefit payment.
- Transfer the remaining units: On the same day, the remaining units, representing the majority of the other member’s pension account balance, were also transferred in specie and accounted for as a partial commutation followed by a lump sum benefit payment.
- Complete the pension payments and commutations: A further pro-rated minimum pension payment was withdrawn from each pension before the pensions were fully commuted at a point in the year before the fund’s available cash ran out.
Impact and outcomes
The staged approach produced a significantly different tax outcome from transferring the asset in one transaction.
Less than $5,000 in CGT was ultimately payable, compared with the approximately $175,000 estimated under a single-transfer approach.
Future distributions from the investment would be taxable at a higher rate outside the SMSF, but could be split between the two individuals according to the parcels they held. As neither otherwise earned significant taxable income, this outcome was more than offset by the potential death benefits tax that could have arisen if the asset remained within the fund.
Both members had substantial taxable components in their member balances. Depending on who died first, these could potentially have resulted in future death benefits tax liabilities of approximately $580,000 and $145,000 respectively.
The strategy also simplified our clients’ overall financial structure and reduced ongoing compliance — an important objective for them at their stage of life.
Careful SMSF planning can make a substantial difference
SMSFs holding valuable but relatively illiquid assets can become more difficult to manage as members move through retirement, particularly when minimum pension requirements, tax implications and estate planning considerations begin to intersect.
The right strategy will depend on the fund, its assets and each member’s circumstances. As this case demonstrates, the timing and structure of an SMSF asset transfer can materially affect the tax outcome.
Talk to Allan Hall Superannuation
If your SMSF holds significant property or other investments and you are considering how those assets should be managed or transferred as you move through retirement, speak with Allan Hall Superannuation before taking action.
We can review your SMSF structure, pension requirements, tax position and longer-term estate planning considerations to help determine an appropriate strategy for your circumstances.
CONTACT ALLAN HALL SUPERANNUATION
This case study is illustrative only. SMSF, taxation and superannuation strategies depend on individual circumstances and professional advice should be obtained before acting.