CGT needs to be considered if delaying SMSF set up

While superannuation fund members thinking about switching to a self-managed superannuation fund (SMSF) may believe their account balance is too low, it is worth thinking about whether the member wanted to avoid a future capital gains tax event later, according to Rice Warner. 

Speaking on a webinar on Monday, Rice Warner chief executive, Michael Rice said there were two options for those looking to switch: waiting until their Australian Prudential Regulation Authority (APRA) account reached a reasonable size to switch or they could switch earlier and pay a slightly higher fee until the account built up. 

“The difference is not as stark as you think because once you roll over it triggers a capital gains event. You could stay in an APRA fund for four to five years, double money and do well and then move it to SMSF but you’ll pay CGT on balance and profits you’ve made,” Rice said. 

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“It’s about thinking about whether you want to pay a slightly admin fee to avoid a CGT event later.” 

Rice Warner’s ‘Cost of Operating SMSFs 2020’ released on Monday said SMSFs “enjoyed an advantage over APRA regulated funds of being able to move from accumulation phase to pension paying without incurring CGT”. 

“APRA regulated funds require the realisation of accumulation account assets and their transfer to a pension account and this triggers the provisions for incurred, but unpaid CGT within the unit prices. There was therefore a financial incentive, which could outweigh operating cost disadvantages, for moving smaller balances to an SMSF,” it said. 

“This advantage for SMSFs has been partly removed because most APRA regulated funds now provide so-called pension bonuses for transfers from accumulation accounts to pension accounts within the same fund. The bonus provides partial compensation for the CGT margin in the unit prices.” 

The report also found that SMSFs with balances of $100,000 to $150,000 were competitive with APRA-regulated funds provided the trustees used one of the cheaper service providers or undertook some of the administration themselves. 

Balances of $200,000 or more were cost competitive with industry and retail super funds, and SMSFs with balances of $500,000 or more were generally the cheapest alternative.  

Source: Rice Warner 

Rice Warner noted other considerations when thinking about starting an SMSFs included who a member wanted to be in the SMSF whether it be family or a business, and whether people in their late 70s and 80s wanted to be managing their own money. 

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