Moving from the accumulation phase to the pension phase generates a number of tax issues at the super fund level that you need to understand.
One of the benefits of the pension phase is that all capital gains – even those earned during the 15% taxed accumulation phase – are tax-free.
The super system is never quite this easy, so here I’m going to explain how the system works.
To understand how the tax system taxes pension assets, it’s essential to appreciate the difference between segregated and unsegregated assets.
I dealt with this particular issue a few weeks ago [1], but it’s worth repeating the basic difference.
Your super fund will have segregated pension assets if it specifies certain assets as being exclusively for the payment of pensions. The unsegregated assets approach is the exact opposite – that is, one or more of your fund’s assets are used to pay pensions and for pre-retiree assets.
If your fund is only used to pay one or more pensions, then this issue is of academic interest.
If you use the unsegregated approach, then each year you need to get an actuarial certificate. The certificate is a legislative overhang from the late 1980s when the super system was very different to what it looks like now.
In reality, these certificates are a waste of time and money and don’t tell you anything you can’t calculate yourself. (The Abbott Government reckons it wants to remove useless regulations – well, here’s one it could get stuck into. No doubt the actuaries will be happy about losing a handy revenue source removed from their businesses. Boohoo, I say.)
The simple reality however is if you don’t bother to get the certificate, your pension’s gains and income will be taxed.
Non-arm’s length income
If your fund earns any non-arm’s length income, then this will be taxed at 46.5% if the assets are being used to pay a pension (this includes any capital gains).
Capital gains and losses with segregated pension assets
In simple terms, you ignore any capital gains and losses made by your fund’s pension assets.
You cannot offset a capital loss made with your pension assets against gains made by all your fund’s other assets. That is, the losses made by the pension assets never have any economic value.
Losses on non-pension assets can be carried forward and used at a later date to offset gains made by those assets (assuming they haven’t been made pension assets in the meantime).
Capital gains and losses with unsegregated assets
Your pension’s capital losses can be carried forward and used in later income years against assessable capital gains.
Your fund’s net capital gain is its capital gains less capital losses (from all assets). This capital gain is then included in a fund’s assessable income before an actuary tells you how much income is exempt from tax.
Carried forward tax losses
This is another important but often-overlooked topic.
Suppose your fund has tax losses (not losses on the sale of assets but losses from having tax deductions higher than assessable income).
In these situations, your losses are used to reduce your funds net exempt pension income (that is, pension income after allowing for relevant expenses).
Only the remaining losses can be used to reduce assessable income this year.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: Come fly with me – a buy on Qantas [2]
- Barrie Dunstan: SMSFs and borrowing – time to get worried? [3]
- Roger Montgomery: Telco sector in focus: is BigAir flying high? [4]
- Penny Pryor: Buy, sell, hold – what the brokers say [5]
- Paul Rickard: What does ‘short’ and ‘long’ mean with regards to shares? [6]