Director – Wealth and Superannuation SMSF
It’s safe to say that many trustees whose funds are in full pension mode are very concerned about the possibility of losing their franking credit refunds should labor win the next election. There is a lot of noise in the media indicating that SMSF’s are going to be the hardest hit and trustees are considering whether an APRA Fund (retail/industry fund) would be a better option moving forward should labor be victorious at the polls. Is “shutting up the SMSF shop” really the answer? The real question is why would a trustee find an APRA fund a better solution than an SMSF and what options are available to even up the playing field.
If Labor’s proposal is passed, APRA funds face the same issue as an SMSF. However the main difference is APRA funds have members who are both in accumulation mode and pension mode. Those in accumulation mode are likely to also be making taxable contributions into the fund which means they are paying 15% tax on both the income that their member balance generates and on their contributions absorbing the franking credits received.
This mix of accumulation and pension members is absolute key in helping to solve the inequity between SMSFs and APRA funds. Following are four strategies which may be considered for those funds who are in full pension mode.
Strategy One – Roll back the pension
Where members don’t need the pension income, consider rolling back to accumulation mode. The maximum tax payable on income and capital gains is 15% which still makes accumulation funds a tax effective vehicle.
Before rolling back to accumulation it’s prudent to review the unrealised capital gains position of the fund and consider realising any gains prior to rolling back to take full advantage of being in a tax exempt environment.
Members that roll back to accumulation are still able to take money out of the fund via a Lump Sum Withdrawal if cash is required.
Key benefits of this strategy:
- You don’t need to draw a pension minimum if it isn’t required; and
- You can ensure the maximum amount possible is retained in a low tax environment (compared with tax rates outside of super).
Strategy Two – Reduce your pension amount
You may wish to consider rolling back part of the pension to accumulation.
Key benefits of this strategy:
- You can reduce the minimum amount required to be withdrawn; and
- You can preserve the capital for longer but leave room in the Transfer Balance Cap if a member finds themselves in receipt of a reversionary pension.
Strategy Three – Make additional contributions
Consider making taxable contributions into the fund (assuming eligibility criteria is met) if there is sufficient income outside of super to generate a tax deduction in the member’s name. The fund will then benefit from the franking credits in the SMSF offsetting any tax payable in the fund.
Strategy Four – Add more members
Consider adding members who are in accumulation mode such as adult children. If legislation passes to allow for a six-member SMSF then grandchildren who are contributing to super could also be considered to make use of the franking credits. With this strategy the SMSF is benefiting like an APRA fund through having a mix of members.
Before making the decision to implement any of these strategies consult your financial adviser as implementation may have a negative impact on Centrelink entitlements and potentially create Transfer Balance Cap issues in relation to reversionary nominations previously made.
If you are still not sold on any of the above strategies, then have a chat to your investment adviser about alternate investment options which don’t involve receiving income with franking credits attached.
The decision to wind up an SMSF and transfer to an APRA fund should not be taken lightly.
Not only can this have a disastrous impact from a centrelink point of view if your pension is grandfathered but it is important to remember why you set up an SMSF in the first place. Control, flexibility, investment choice, better performance and transparency are normally on most people’s list. At the end of the day the government will always try and interfere with superannuation but SMSF’s still remain the most tax effective wealth creation vehicle.
For more information, please talk to your financial adviser.
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