Consider how the structure of your SMSF could affect CGT liabilities
A Self Managed Super Fund (SMSF) needs to be well structured, particularly with regards to its long term future. Whilst, passing on a SMSF is not something people generally like to think about, it is important that trustees and advisors are careful when preparing pension documents for people who are moving from accumulation phase to pension phase. This is because when the time comes and a person in pension phase dies, assets will generally be sold to pay a lump sum to dependants. The capital generated from the sale of these assets will likely become subject to Capital Gains Tax (CGT) and it is for this reason that your SMSF planning should also take your family and other beneficiaries into consideration.
The payment of CGT will depend on the individual situation of the deceased person. Things such as superannuation interest and whether or not the person has died in accumulation or in pension phase will affect the outcome in each case.
Upon passing away in accumulation phase, the deceased’s SMSF may have to sell assets to pay a death benefit to the dependants and there may be CGT obligations. Assets are also able to be transferred to the dependants, instead of being sold and cash being given. This is treated the same as if the SMSF has sold the asset to an outsider and Capital Gains Tax cannot be avoided.
Once the dependants have received the death benefit, CGT will be paid depending on the component of the payment (taxable or tax free) and if they are death benefit dependants or not.
Any asset that provides income to a person in pension phase is exempt from any tax or CGT. However, if the Self Managed Super Fund owner dies at this stage, their assets will then cease to become exempt from taxes on their date of death. These assets are then classed the same as accumulation phase assets and will possibly become subject to CGT when being sold or transferred.
If the SMSF has a reserving policy and a lump sum is being paid to a dependant, the trustee is able to pay the amount of the deceased’s superannuation interest as well as the contribution tax paid by the deceased from a reserve account .This payment is called anti-detriment payment.
An anti-detriment payment can allow the SMSF to claim a huge expense for the fund and carry forward this loss for the life of the fund. This loss can create a tax shelter for contributions from young members of the fund for future years.
How can a SMSF avoid paying CGT upon death of a pension member?
Assets that contribute to paying a pension can continue to be generating an income stream when those assets are considered to be in “pension phase”. In order to do this, and to avoid CGT liabilities in the future, the income stream should be designed so that it is reverted to a death benefits dependant upon the death of the pensioner. What this implies, is that the income stream never stops and payment is transferred to the death benefit dependant. It is important to be aware that adult children over the age of 18 and not studying (unless disabled) are not death benefits dependants; as such the pension cannot be reverted to them. For adult children that are studying the age limit to receive a reversionary pension is 25.
When creating pension documentation and planning the future of your Self Managed Super Fund, it is important to take potential future CGT obligations into account. This can help to make an already upsetting time less stressful, complicated and costly for those involved. Here at The Quinn Group, our experienced team of Accountants and Financial Planners can help you with your SMSF and CGT related enquiries as well as any other tax needs. Submit an online enquiry for more information or call us on 1300 QUINNS (784 667) or on +61 2 9223 9166 to make an appointment.