Self-managed super funds (SMSF) trustees and advisers are being warned a common tax-minimisation tactic could be viewed as a criminal act by the Australian Tax Office (ATO).
Some SMSF administrators have been known to backdate pension commencement dates to minimise tax. The tactic is particularly dangerous when dealing with exempt current pension income (ECPI).
ECPI is the investment income from an SMSF that is exempt from tax when in the retirement phase.
It can be calculated in two ways: the segregated method and the proportionate method.
The ATO is concerned about the segregated method.
According to the ATO website, in the segregated method, fund assets are considered segregated current pension assets if the assets are identified as supporting retirement-phase income streams and the sole purpose of these assets is to pay retirement-phase income streams. Capital gains and losses are disregarded if a capital gains tax event occurs in relation to a segregated current pension asset.
In the proportionate method, the fund calculates the ‘exempt proportion’ of income based on the proportion of the fund’s total liabilities that are current pension liabilities. Generally, this will be the proportion of the fund’s total account balances that are retirement-phase income streams.
This exempt proportion is averaged across the period of the year the fund used the proportionate method. It’s determined by an actuary who provides an actuarial certificate.
DBA Lawyers special counsel Bryce Figot told SMS Magazine, SMSF members looking to calculate ECPI using the segregated method were often unable to do so because of the disregarded small fund asset rules, which apply where someone in a fund in retirement phase had a total super balance over $1.6 million.
Exceptions to the rule
However, Mr Figot noted that an exception to this rule created in 2021 allowed an SMSF to have segregated current pension assets if, apart from the disregarded small fund asset rules, all of the assets of the fund would be segregated current pension assets.
He gave the example of a $3.8 million SMSF with two members, both aged 65, which was in accumulation mode from 1 July to 31 December 2023, but started two $1.9 million account-based pensions on 1 January 2024 and then sold a property asset on 2 January for $3 million, resulting in a $2.5 million capital gain.
“How much tax is payable? Well, it depends if the asset is a segregated current pension asset and, since the 2021 changes, that could apply because the whole fund is now in pension mode, meaning the capital gain is disregarded and no tax is payable,” he said in a recent briefing by the law firm.
“If, however, the asset is not a segregated current pension asset, it will come down to what percentage an actuary certifies. I suspect that an actuary might certify that 50 per cent of the fund’s income relates to current pension liabilities and if the fund was in pension mode for half a year, only half of the income is exempt.”
Tax position
He said this tax position could have been reduced if the pensions had started on 1 July 2023, rather than 1 January 2024, because an actuary would likely certify the income was around 99 per cent exempt. However, he warned SMSF members should not falsify pension start dates.
“We often get the question: ‘Can we say that the pension did start on 1 July as the ATO says you are able to start a pension, but not make the payment until months afterwards?’” he said.
“The answer is ‘no’. Firstly, you will draw attention to yourself very quickly because you’ll be lodging late transfer balance account reports and, secondly, it’s a crime.
“That would be a falsified document and if you look at section 83 of the Crimes Act, there are some specific elements and you might find yourself satisfying those, and an extreme manifestation of it is 10 years in prison.
“I haven’t actually seen anyone being imprisoned for it, but [I] have seen other bad implications occur so don’t backdate.”
Do you have an SMSF fund? Did you know about this practice? Why not share your thoughts in the comments section below?
Also read: ATO targets illegal SMSF withdrawals
