Tax Office reacts to superannuation funds selling assets after entering pension phase
Tax Office reacts to superannuation funds selling assets after entering pension phase
The ATO has issued a Draft Taxation Determination (TD 2013/D7) that self managed superannuation funds (SMSFs) that sell assets shortly after entering pension phase could be considered to be subject to anti avoidance legislation.
It is a relatively common practice for retired members to put their fund in pension mode sometime after turning 60 years of age, a point at which the fund becomes non-taxable. It is therefore common to delay the disposal of assets in the fund which have a large capital gain accrued until this time when the gain becomes non-taxable.
The ATO considers (and we agree) that the sole purpose of operating a super fund is to provide for retirement. The ATO doesn’t consider that maximising after-tax investment funds available for retirement, satisfies this criteria.
The ATO commentary states:
“If an asset is purported to be segregated (put into a pension) shortly before disposal, and then disposed of in circumstances where a capital gain is exempt income, it will be a question of fact having regard to all the circumstances as to whether it was invested for the sole purpose of enabling the fund to provide superannuation income stream benefits and to whether the anti-avoidance provisions would apply.”
Effectively the ATO is saying where a sale is conducted shortly after commencing the pension phase and a capital gain realised the prospect of Part IVA anti-avoidance provisions is raised.
The onus would be, under these circumstances, to show the decision to move to pension phase was not triggered by an attempt to avoid capital gains tax in the fund.
There is no guidance as to what the Commissioner considers to be a reasonable time to pass before the realisation of an asset is not going to be considered under Part IVA. Unless the funds assets are liquid, it is probable that some realisation of asset will occur after entering pension mode. Clients who recently converted to pension mode should discuss a review of transactions occurring around that time.
