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Negative returns, effect on members tax free?

Discussion in 'Superannuation, SMSF & Personal Insurance' started by netd, 23rd Jul, 2014.

  1. netd

    netd Member

    Joined:
    15th Jun, 2012
    Posts:
    12
    Location:
    Sydney, NSW
    Negative returns, effect on members tax free?

    Hi,
    I think this question will have a big impact to a lot of people who had super during the GFC, it seems to me a lot of accountants are reducing the tax free amount of super balances unnecessarily.
    Here is the problem;
    There seems to be two schools of thought as to what happens when at the end of a financial year a members accumulation account balance is less than the members tax free amount and what happens in subsequent years when allocated earnings return the members accumulation account balance to greater than the members original tax free amount (see link to an example bellow).
    Some believe the members tax free component is permanently reduced to the account balance that was below the members tax free amount at the end of a financial year.
    Others believe once allocated earnings return the members accumulation account balance to greater than the original members tax free component the members tax free component should return to the original tax free amount (I believe this).
    I have talked to the ATO any they could not tell me which way is correct.

    The INCOME TAX ASSESSMENT ACT 1997 - SECT 307.210 says ?The tax free component of a * superannuation interest is so much of the * value of the interest as consists of:
    (a) the * contributions segment of the interest; and
    (b) the * crystallised segment of the interest......etc?
    and the INCOME TAX ASSESSMENT ACT 1997 - SECT 307.220 says ?The contributions segment of a * superannuation interest is so much of the * value of the interest as consists of contributions made after 30 June 2007, to the extent that they have not been and will not be included in the assessable income of the * superannuation provider in relation to the * superannuation plan in which the interest is held......etc.?
    Basically the sum of the non concessional contributions.
    To me this means a temporary dip in the account balance bellow the tax free amount that happens to be on the 30th of June has no bearing on the calculation of the tax free amount of the interest at a later date.

    Which is correct ? If you have an opinion I would like to know.
    Thank you.


    See Example at;
    http://www.knowledgeshop.com.au/acc...6/Allocation-of-losses-within-member-accounts

    And more info at;
    Article :: Rolling over a tax-free component
     
  2. Christianrenel

    Christianrenel Active Member

    Joined:
    13th Jan, 2015
    Posts:
    31
    Location:
    Sydney
    Tax Free Component

    Hi Netd,

    My understanding is that the tax-free component of the superannuation is made up the following component

    - The contributions segment of the interest
    - The crystallised segment of the interest

    Looking at another piece of legalisation ?proportioning rule.? Suggested when they calculate the tax ?free proportion.

    INCOME TAX ASSESSMENT ACT 1997 - SECT 307.125 Proportioning rule

    -what first needs to be worked out is the value of the superannuation interest that those components represent

    - next applying those proposition to the benefit.

    I also believe in the following once the tax free component has been allocated to fund. The fund reduces in value, the tax free component percentage should remain the same, even when the fund fluctuates in value.

    Kind Regards

    Christianrenel

    Christiannrenel@pricefinancial.com.au
     
  3. netd

    netd Member

    Joined:
    15th Jun, 2012
    Posts:
    12
    Location:
    Sydney, NSW
    Perhaps this example will better illustrate my question;

    A member joins a SMSF and only ever makes one contribution a non-consessional contribution of $100,000 on 10/06/2014. Due to falling share prices over the next 20 days the members balance is recorded as $80,000 on the 30/06/2014 members statement. As the value of the members tax-free component cannot exceed the value of their total superannuation interest the members tax-free component is recorded as $80,000 on the 30/06/2014 members statement.
    On the 01/12/2014 the member decides to take a lump sum of $50,000 the members balance is determined to be $120,000 before the lump sum is paid.

    What is the tax free component of the $50,000 lump sum?

    ($100,000 / $120,000) x $50,000 = $41,666.67
    or
    ($80,000 / $120,000) x $50,000 = $33,333.33

    The way I understand the INCOME TAX ASSESSMENT ACT 1997 - SECT 307.210 and the INCOME TAX ASSESSMENT ACT 1997 - SECT 307.220 the tax free component of the $50,000 lump sum would be $41,666.67.

    Can someone please confirm which is the correct value for the tax free component in this example.

    I would very much appreciate any help with this question.


    Hi Christianrenel,
    Thanks for your response to my original post above.

    As far as I understand it, this would be correct for a pension, where the pension establishment values are used to determine the tax free percent, but for an accumulation account the percentage will change (see the equation above), as the members tax free amount is not normally affected by fluctuations in the value of the assets (except while the members account balance is bellow the members tax free amount, when this is the case it's a constant 100% tax free).

    Thanks,
    netd
     
    Last edited by a moderator: 28th Jan, 2015
  4. Christianrenel

    Christianrenel Active Member

    Joined:
    13th Jan, 2015
    Posts:
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    Location:
    Sydney
    Tax Free Component $50,000

    My understanding using your example to work out the tax free component of SMSF.

    If a superannuation fund has 100% tax free component from the beginning. The fund investment reduces to $80,000 and the investment is sold at this point. The tax free componment remains to be 100% at $80,000.

    If SMSF purchases another investment at $80,000 and this increase to $120,000 at later stage. The would increase the taxable component of the superannuation account.

    Superannuation Benefit $120,000 Percentage
    Tax free $80,000 66%
    Taxable $40,000 33%

    Based on the withdrawal from the superannuation fund of $50,000.

    Superannuation Component $50,000 Percentage
    Tax Free $33,000 66%
    Taxable $17,000 33%

    This would be different if the superannuation account did not sell the investment at $80,000 and that investment increased to $120K would be impact the taxable component.

    Kind Regards

    Christianrenel

    christianrenel@pricefinancial.com.au
     
  5. netd

    netd Member

    Joined:
    15th Jun, 2012
    Posts:
    12
    Location:
    Sydney, NSW
    I asked the ATO. Positive returns do restore the tax-free component.

    So in the example above the tax-free component of the $50,000 lump sum is

    ($100,000 / $120,000) x $50,000 = $41,666.67

    Hope this is useful to someone.