ATO backs off an SMSF property crunch

In November 2011, a draft tax ruling (TR2011/D3) by the ATO caused concern among Self Managed Superannuation Fund trustees and property investors in particular.  The ruling suggested that the pension tax exemption ceases automatically upon death (unless a reversionary pension was in place).

Under those proposed rules, if an SMSF member died with any assets, including a property, carrying large unrealised capital gains, even if the deceased were receiving a pension, upon death the pension would revert to accumulation and the tax free status would cease (without an auto-reversionary pension). If the property had to be sold or transferred out of the fund to pay a death benefit this would trigger a capital gains tax event.

You can imagine the scenario of someone having held a property in their fund for 20-30 years or even longer and how much of a capital gain would have accrued in that period. Many of the properties in SMSFs are industrial and commercial properties used in business and likely to have gained substantially in value over the years. Property is not like shares where you could sell down your BHP and crystallise the gain while in pension phase and buy RIO instead there by wiping out any gain. The likely 10% CGT bill would have been another blow to superannuation strategies.

There has been intense lobbying of the ATO and Government by industry participants to reconsider this ruling.

After many promised deadlines and subsequent delays the Government has announced as part of the 2012 Mid-Year Economic and Fiscal Outlook that:

The Government will amend the law to allow the tax exemption for earnings on assets supporting superannuation pensions to continue following the death of a fund member in the pension phase until the deceased member’s benefits have been paid out of the fund. This change will have effect from 1 July 2012. This measure is estimated to have a small but unquantifiable cost to revenue over the forward estimates period.

The superannuation law requires the benefits of a deceased member to be paid out of the fund as soon as practicable following the member’s death. The continuation of the earnings tax exemption beyond the death of a member will be subject to this existing requirement.

This change will benefit the beneficiaries of deceased estates by allowing superannuation fund trustees to dispose of pension assets on a tax‑free basis to fund the payment of death benefits.

Many trustees may not even have been aware of the draft ruling but their advisers and accountants certainly would have been and like me they would be sighing with great relief this week. This is great news for anybody with a property currently in their fund or considering purchasing any large illiquid asset expected to grow in value.

Now if we could only get rid of the “Death Tax” on payments to non-tax dependent beneficiaries…but that’s a fight for another day!

Liam Shorte offers weekly advice on SMSF tactics and strategy at Macro Investor. Take up your free 21-day trial today.

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  1. Read your article in macro investor. Can a fund convert from individual trustees to corporate trustee?

    • Yes it can be done but failed baby boomer is right and the process is arduous. But you just treat it like any process and know what you need for each investment as it can be very frustrating to get it all sent back to you. Talk to your adviser / Accoutnant as either they will do it or they can cross check your paperwork before submitting it.

      A few tips:

      1 sell of small holdings that are not core to your strategy to avoid the hassle.
      2. Just leave term deposits to mature and change when you reinvest
      3. Choose a simple name for your corporate trustee as you will be writing it many many times.
      4. You do not need at new TFN and ABN so no worries there.
      5. Managed funds may require the transfer to be stamped by the OSR so expect delays


      • Well said.
        Also be aware
        * of some trying to make the event a CGT event.
        * if your in Pension phase a poential recommencement of pension amounts – read your trust deed – get advice, follow advice
        * make sure it is correctly minuted

        it may actually be easier and quicker to close existing and set up a new SMSF (watch tax issues but gfc may have assisted in minimising these


  2. Failed Baby BoomerMEMBER

    I converted my fund from individual trustees to corporate trustee. It was a real slog and you have to deal with each investment account individually. The fund/investment managers are not very helpful and be prepared for some tough negotiating (i.e. threaten to close your account and take it elsewhere). Get up-to-date advice from your accountant before you start. Good luck.