Running your own superannuation fund can be more complicated than you think. Some clients are questioning whether an SMSF is still appropriate for them, and are seeking advice on how to transfer their benefits into a public super fund. However, where the SMSF is in a capital loss situation, winding up the SMSF and transferring to another super fund can mean losing valuable tax benefits as capital and revenue tax losses cannot be rolled over to the new fund.
The good news is there is some temporary relief available that will allow a super fund to rollover losses to another super fund. Although this relief was intended to help facilitate the merger of large super funds under successor fund arrangements, it can also apply to an SMSF transferring into a larger super fund. The relief only extends to transfers that occur after 24 December 2008 and before 30 June 2011. This means the relief is only available for transfers occurring before 30 June 2011.
IOOF has made this facility available to financial advisers whose clients wish to wind up their SMSF and rollover capital losses to Pursuit Select Personal Super. What this means is that clients will not lose their capital losses when they wind up their super fund. IOOF will take the capital losses and record them against the member’s new Pursuit Select account until they can be used against any future realised capital gains that the member incurs in the account. Unused capital losses remain attached to the account indefinitely until used. Further, if IOOF can use any of the capital losses against capital gains incurred by other members, the member’s account will receive a cash credit for the value of the capital losses used.
If the SMSF is holding revenue losses, these can also be rolled over to Pursuit Select. Members receive an immediate cash credit to their account for the value of any rolled over revenue losses.
Transferring from one super fund to another super fund is a CGT event. The transferring fund will ordinarily incur capital gains or losses from either selling assets to cash prior to transfer (CGT event A1) or by transferring investment assets in-specie to the new super fund in-specie (CGT event E2). Either way, for CGT purposes, the assets are deemed to have been realised by the transferring fund and CGT is liable on net gains. Capital losses that cannot be used by the transferring fund cannot be rolled over and are effectively forfeited.
As capital losses cannot be carried over to the new super fund, the members may lose valuable tax benefits as a result. This has proved a stumbling block for a number of large super funds wanting to merge under successor fund arrangements.
Consequently, to facilitate large fund mergers, the Government agreed to provide temporary loss rollover relief until 30 June 2011. The relief is not limited to large fund successor fund transfers and can apply to the voluntarily transfer of an SMSF into a large super fund (like Pursuit Select Personal Super). The legislation provides merging super funds with relief to either:
The legislation also extends loss rollover relief to revenue (tax) losses and provides relief for accepting s.290-170 Tax Deduction Notices where loss rollover relief applies. Under the latter relief, a receiving fund can accept an s.290-170 Tax Deduction from a member in respect of personal contributions made to the previous fund.
Loss relief applies to SMSF choosing to wind up and transfer all members into a larger super fund from 24 December 2008 through to 30 June 2011. There is possibility that the legislation will be extended beyond 30 June 2011 to facilitate further consolidation of the superannuation industry in light of the Cooper Review recommendations.
If the conditions for relief have been met, on transfer to Pursuit Select Personal Super, the prior year’s capital losses and current year’s capital losses will be recorded against the new member’s account. These losses will then be used to offset against future realised capital gains incurred in the account by the member. If the trustee of Pursuit Select can use excess capital losses held by a particular member against other members’ realised gains, the donating member’s account will receive a cash credit for the value of the losses used.
Advisers should note that, although the Pursuit Select Personal Super administration system will record the transferred losses against the member’s account and apply them against future realised gains, the amount of unused losses held in an account are not reported on Portfolio Online. Advisers will need to ensure they keep their own records of the amount of unrealised losses going forward for their client’s benefit.
If an SMSF is transferring revenue losses, IOOF will provide an immediate cash credit to the member’s account for the value of the revenue losses, as revenue losses can be used by Pursuit Select in the year of transfer.
Step 1: An ‘arrangement to merge’ must be agreed to by the SMSF and Pursuit Select Personal Super. A document evidencing an ‘arrangement to merge’ does not have to meet specific criteria.
Step 2: Transfer benefits for all members from SMSF to Pursuit Select
Step 3: Election and declaration