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SMSF to SMSF partial rollover: documentation and process

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HRF
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I welcome this ATO community initiative and feel sure it will be helpful to all parties.

 

Hope this long and detailed entry about doing a partial rollover from SMSF to SMSF – background followed by four questions - will help others as well as myself.

 

Background

 

Myself & wife SMSF1 balance about $3m, all in accumulation stage, (my balance about $2m), all simple listed ASX assets, all “preserved”, all post-1999, proportionate basis. Pre 1July 2007 I made about $322k non-concessional contributions, but no NCC after that date. Using retired, aging, suburban accountant. To be frank, I am asking questions here to double check that we don’t cause some current or future disaster by putting wrong numbers in the wrong boxes kind of thing.

 

I have just established an additional SMSF2 (same me + wife) with major reputable on-line SMSF administrator (and have verified by visiting the bank that stuff is properly set up over there.)

 

SMSF1 will continue for a few years meanwhile, entirely in accumulation phase.

 

The reason for the extra expense of creating SMSF2 is to access efficient professional administration of all the complexities of pension phase mixed with accumulation phase, caps, etc. This will arise quite soon: about December 2017 I will trigger a condition of release by being over 60 and terminating an employment. But my questions below aren’t about the future pension etc. issues, only about the current rollover into SMSF2.

 

In the next week or two, I will rollover about $1.7m of my own member benefits (not wife at this stage) from SMSF1 to SMSF2. Just simple roll-over accumulation to accumulation, cash (by bank draft), no withdrawals or any other actions at this time. I chose partial roll-over on the assumption that full roll-over would probably be a bit onerous (require a lot of accountant time at short notice) in terms of accurately determining member balances etc. mid-year. Anyway, $1.7m suffices (exceeds the $1.6m cap) for starting pension phase after December.

 

My questions focus on getting the process and doco correct before, during and after this simple (in principle) rollover task.

 

Questions

 

From hours of study of ATO website, and also “SMSF manual” by Tax & Super Austalia, (each of which is pretty good actually,) I have tried to understand the relevant detail but struggle a bit owing to complexity, terminology, unfamiliarity. To save asking too many questions, only the most confusing issues are asked here (questions 1-4). Other things are stated, meaning I think I understand them, but please advise if you detect otherwise.

 

1) General

 

A rollover does not of itself generate any tax liability since the money goes from one accumulation account to another accumulation account. Whatever earnings these funds make will in any case be taxed at 15% either in SMSF1 (before rollover) or in SMSF2 (after rollover). SMSF1 has sufficient funds and member balances to meet tax liabilities and other expenses, even after the rollover. There is no need for SMSF1 to “withhold tax”. The “untaxed plan cap” (which I don’t understand) is not an issue.

 

2) Before the roll-over:

 

SMSF1 trustees to minute the actions.

$1.7m cash has been freed up by liquidating listed assets, selected to keep capital losses greater than capital gains to avoid a CGT liability in TY2018.

 

[Question 1:] The ATO supplies a rollover request form NAT74662 but only for full rollover not partial rollover. Can SMSF1 adapt that form or basically just minute the equivalent information? Is this just for SMSF1 minutes or does it have to be sent anywhere else?

 

3) Doing the roll-over

 

Transfer the funds – takes a couple of days to clear.

SMSF1 must issue a Rollover Benefit statement RBS NAT70944, and send that to SMSF2 within 7 days and to the member (myself) within 30 days.

 

[Question 2:] How to fill in Section C: Rollover transaction details 13) tax components?

“Tax free” component seems to maybe be $322k (the pre-2007 NCCs) but I could not understand the ATO web pages on the subject of “crystallised segment” and the five components listed under there.

“Taxable component, Element untaxed in the fund” is presumably nil.

“Taxable component, Element taxed in the fund” is the remainder $1.378k.

Does this look correct? Please explain whatever I need to know.

 

SMSF2 administrators must record the relevant components and elements – or maybe just the components “taxed vs untaxed” or is it called “tax-free vs taxable” – what is the correct ATO terminology here?

 

However it doesn’t make a huge difference what the components and elements are since $1.6m of the funds will soon enter pension phase and start paying a fully tax-free pension. The pension interest will be tax-free on its earnings, and the pension payments will be tax-free in my hands (assuming correct compliance and admin). On death the only beneficiary is my wife and in that case the components are also not relevant.

[Question 3:] In what circumstances do these components make any difference, assuming a member is retired and past 60 and bequeaths only to spouse?

 

4) After the rollover

 

There is no need to inform the ATO about the rollover at this time, but naturally there are various details to get correct at the end of tax year TY2017/18. I am confident that the professional computerized administrators of SMSF2 will deliver the correct reporting and compliance.

 

[Question 4:] For SMSF1, what details must my accountant pay attention to, especially which amounts in which boxes in the SMSF annual return, member statements, or wherever. This question is less urgent because this is still many months away.

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Best answer

Devotee

Replies 6

Hi HRF

 

Lots of things to work through here...

 

Your comments under the 'General' heading are on the mark. For clarity, in relation to whether the earnings are taxed in SMSF 1 or 2 it depends on which fund initially receives the earnings. ie you can't receive earnings in SMSF 1, include them in the rollover, then treat them as earnings received in SMSF 2. Also - SMSF 1 won't be required to withhold anything from the rollover as I'm assuming there'll be sufficient money left behind to pay taxes on fund earnings that are attributable to your account. And yes, untaxed plan cap only relates to unfunded defined benefit schemes. Your SMSF will be fully funded.

 

In question 1 you refer to NAT 74662. This form is for rollovers from an APRA regulated fund to an SMSF, not for rollovers between SMSFs. Use the rollover benefits statement (RBS) (NAT 70944) that you refer to instead.

 

In relation to question 2 about filling out section C of the RBS:

 

The tax free component will be most of the $322K of pre-2007 NCCs you've made. It sounds like you haven't made any non-concessional contributions since, and it doesn't sound like there's a pre 1983 component in your fund.

 

The reason I say 'most' is because a proportioning rule applies. You can't pick and choose which components you want to roll over. If 15% of the money in your account in SMSF 1 is a tax free component, then 15% of any partial rollover will be a tax free component.

 

Correct, no untaxed element. Again, this is for unfunded schemes and isn't relevant for you.

 

And yes, the remainder of the rollover amount will be the taxable component - element taxed in the fund.

 

Tax-free, taxed and untaxed are generally understood terms when it comes to the components of a benefit or rollover. Tax-free are the non-concessional personal contributions, the taxed component is the earnings on the contributions plus any concessional contributions, and the untaxed component is relevant for unfunded defined benefit funds, where the money owing to a member is paid from government revenues at the time the member becomes entitled to the benefit payment.

 

Question 3 about when the components make a difference. It'll only make a difference if a death benefit is paid to a non-dependant, when any taxed element paid will be subject to tax.

 

Question 4 - In section F: Member information on the SMSF annual return there's a label (Q) for outwards rollovers and transfers. For SMSF 2 there's another label (P) where incoming rollovers are reported. And again, make sure that the tax payable on fund earnings in SMSF 1 is correctly allocated between yourself and your wife and that the rollover doesn't accidentally create a larger than equitable tax burden on her account.

 

This is my personal view; I’m an ATO employee who chooses to help out here in my own time.

7 REPLIES 7

Best answer

Devotee

Replies 6

Hi HRF

 

Lots of things to work through here...

 

Your comments under the 'General' heading are on the mark. For clarity, in relation to whether the earnings are taxed in SMSF 1 or 2 it depends on which fund initially receives the earnings. ie you can't receive earnings in SMSF 1, include them in the rollover, then treat them as earnings received in SMSF 2. Also - SMSF 1 won't be required to withhold anything from the rollover as I'm assuming there'll be sufficient money left behind to pay taxes on fund earnings that are attributable to your account. And yes, untaxed plan cap only relates to unfunded defined benefit schemes. Your SMSF will be fully funded.

 

In question 1 you refer to NAT 74662. This form is for rollovers from an APRA regulated fund to an SMSF, not for rollovers between SMSFs. Use the rollover benefits statement (RBS) (NAT 70944) that you refer to instead.

 

In relation to question 2 about filling out section C of the RBS:

 

The tax free component will be most of the $322K of pre-2007 NCCs you've made. It sounds like you haven't made any non-concessional contributions since, and it doesn't sound like there's a pre 1983 component in your fund.

 

The reason I say 'most' is because a proportioning rule applies. You can't pick and choose which components you want to roll over. If 15% of the money in your account in SMSF 1 is a tax free component, then 15% of any partial rollover will be a tax free component.

 

Correct, no untaxed element. Again, this is for unfunded schemes and isn't relevant for you.

 

And yes, the remainder of the rollover amount will be the taxable component - element taxed in the fund.

 

Tax-free, taxed and untaxed are generally understood terms when it comes to the components of a benefit or rollover. Tax-free are the non-concessional personal contributions, the taxed component is the earnings on the contributions plus any concessional contributions, and the untaxed component is relevant for unfunded defined benefit funds, where the money owing to a member is paid from government revenues at the time the member becomes entitled to the benefit payment.

 

Question 3 about when the components make a difference. It'll only make a difference if a death benefit is paid to a non-dependant, when any taxed element paid will be subject to tax.

 

Question 4 - In section F: Member information on the SMSF annual return there's a label (Q) for outwards rollovers and transfers. For SMSF 2 there's another label (P) where incoming rollovers are reported. And again, make sure that the tax payable on fund earnings in SMSF 1 is correctly allocated between yourself and your wife and that the rollover doesn't accidentally create a larger than equitable tax burden on her account.

 

This is my personal view; I’m an ATO employee who chooses to help out here in my own time.

HRF
Initiate

Replies 0

Thank you SebReiter, that clears up many things I was confused about.

Devotee Registered Tax Practitioner

Replies 4

Q 2   -   The tax free $ amount wil not change unless there are NCC after last 30 June, but the % tax-free will change because earnings add to the taxed component.  Best to do proper accounts up to the roll out date.  Then the % breakdown will be correct.

 

Q 3  -   or if the member rolls out to another fund again, or starts an income stream, or makes a commutation.

 

 

Encouraging people to do stuff that they do not understand just makes it difficult for whoever has to do the fund accounts later.

HRF
Initiate

Replies 3

Thanks for your additional commets. I will be seeing my accountant soon and the responses so far are very helpful in establishing confidence in what's invoved in the process.

Community Support

Replies 2

Hi @HRF,

 

Welcome to our Community - you've received some very useful information already from @SebReiter!

 

We just wanted to provide some links to information on our website that might also be useful:

If you'd like to receive a more detailed personalised response, you can write to us as it seems there may be some complex issues that would be best addressed personally rather than in a public forum.

 

Thanks.

 

HRF
Initiate

Replies 1

Thanks JodieH, the ATO website is indeed useful.

Meanwhile I have met my accountant and arranged to transfer the work to other accountants who are more up-to-date with the SMSF world.

 

SX
Enthusiast

Replies 0

yes, the new rule says the initial receiving fund will pay tax. so all tax matters & tax components should be with old fund before roll-out,

 

SX

 

 

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