While keeping long-term tax records — especially those that relate to capital gains on investments — should always be part of the efficient administration of a self-managed superannuation fund (SMSF), this will become a major new responsibility for trustees as a result of changes to pension rules from July 1.
Whereas the long-term administration of super-related capital gains on investments has for decades been more or less manageable once SMSF members are fully in pension phase — when capital gains tax (CGT) and losses are disregarded — things will be different from July 1.
The entitlement that some funds have to defer capital gains on investments that will become partly taxable under the new $1.6 million pension account limit rules will bring with it extra record-keeping responsibilities that trustees must comply with.
"Managing capital gains, especially deferred gains, will be a hot potato issue both this year and into the future," says Chris Malkin, a senior auditor with Baumgartner Super in Melbourne.
There will be many potential traps for retirees and holders of transition to retirement (TTR) income streams in respect of capital gains, he says. Where they choose to claim CGT relief on pension amounts that must be rolled back into taxable accumulation accounts, they will need to be aware of what tax deferral really means.
A risk for those who claim CGT relief and choose to defer a CGT liability into the future, says SMSF specialist financial planner Jemma Sanderson of Perth-based Cooper Partners Financial Services, is losing track of this on very long-term investments, such as property assets.
Cost base reset
CGT relief involves resetting the cost base (ie, the cost when you bought them) of any investments supporting super pension income in the retirement phase to their value on the date amounts are transferred to the accumulation phase to comply with the $1.6 million transfer balance cap. The entitlement provides relief for any capital gains accumulated on any super pensions that would have been tax-exempt income if they were sold prior to this major super reform.
Relief can also be applied for where SMSF members have a TTR income stream on investments that support them which become taxable from July 1.
Where a super fund's assets are partially supporting interests in the accumulation phase – because a fund has a member that hasn't started a pension from their super as yet – and CGT relief is sought on those investments, says Sanderson, tax will need to be paid on this proportion of the capital gain up until July 1 that won't be exempt from tax. This non-exempt gain may be deferred until the investment is ultimately sold but the deferral must be reported to the Australian Taxation Office in the fund's 2016-17 annual return.
Let's look at a deferred gain, says Sanderson, if a fund happens to have a pension member and an accumulation member, with 50 per cent of the investments supporting each member. If the fund owns a property with a $600,000 capital gain, it will be entitled to claim CGT relief on the 50 per cent pension proportion and create a deferred gain on the non-exempt proportion. Under the superannuation CGT rules, a one-third discount will reduce the gain to $400,000 of which half ($200,000) will be taxable at 15 per cent. That's a $30,000 tax liability that can be deferred until the property is ultimately sold.
What will be very important, says Sanderson, is the fund keeping all records that explain what has happened. Whereas certain SMSF tax records must be kept for five years and others for as long as 10 years, records that relate to CGT relief applications must be kept for as long as the deferred CGT liability exists. This might be longer than a decade for substantial assets like a property.
Under current income tax rules, SMSFs must maintain tax records that document transactions they undertake. This documentation can be maintained either in paper form or stored in an electronic format that can be converted into paper if this is required. The information must be easily assessable.
Five-year rule
As a general rule, tax records should be retained for at least five years after the later of the date on which the records were prepared.
If it involves a capital purchase, records will generally be required to be kept from the date of purchase until five years after the CGT event (such as a disposal) has occurred and this period may be extended further if the disposal results in a capital loss.
Sanderson recommends that taxpayers prepare detailed records and supporting documents at the time they either enter into a transaction or adopt a tax position in order to manage tax risk. Although five years is generally the period records must be kept for tax purposes, other legislation may require longer periods.
For example, there are certain SMSF records that must be kept for a minimum of 10 years — namely minutes of trustee meetings and resolutions, records of all changes of trustees, trustee declarations recognising the obligations and responsibilities for any trustee, or director of a corporate trustee. The same goes for the written consent members must sign to be appointed as trustees, copies of all reports given to members as well as any documented decisions about the storage of collectables and personal-use assets where a fund owns such assets.
Sanderson says trustees will in the future need to diligent about keeping records. Most difficult in her opinion could be records that relate to property investments from many years earlier.
People, she says, can lose track of fund records when they move house or appoint a new accountant or administrator to look after their fund. Perhaps they bought a property in the 1980s or 1990s, which is now many decades ago. These records will almost certainly have been kept in paper form and in some cases been converted to electronic form that may have seen the originals no longer available because they weren't considered necessary.
WA problem
Not having original documents can create a problem in Western Australia, for instance, when dealing with the Office of State Revenue if a fund wishes to transfer investments from itself to an individual member, which is a strategy SMSFs often employ. SMSF deal with the State Revenue Office when they wish to claim a stamp duty concession for such a transfer.
Often funds will be asked to show original documents with respect to a property transaction to prove that the SMSF has always owned the investment.
Note: It is with sadness that I record the passing a week ago of one of my most respected contacts for many decades, accountant and CGT specialist Gordon Cooper after a tragic accident involving a motor vehicle. His opinions would have certainly been included in a report such as this.
AFR Contributor
