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Australian super legislation allows you to establish and run more than one SMSF, but it’s important to understand the potential for downsides as well as benefits.
More people are considering setting up a second SMSF since the following key changes were introduced to super legislation from 1 July 2017:
- SMSFs no longer being able to split different assets between tax-free pension accounts and taxable accumulation accounts.
- a $1.6 million ceiling being placed on the amount that can be transferred to super pensions (known as the transfer balance cap). Individual members with higher balances now must maintain both accounts in an SMSF.
In fact the ATO reported that in late 2018 there were
- 13,057 individuals with two SMSFs
- 473 individuals with three SMSFs
- 100 individuals with over four SMSFs
The ATO also said that they were investigating the 100 people with more than four SMSFs, but their early analysis indicates they were established “for bona fide reasons”. This reinforces that there must be legitimate reasons for establishing more than one SMSF to ensure compliance with SMSF rules and avoiding penalties for non-compliance.
When could it make sense to run two SMSFs?
1. When one or more fund members have a high balance and are in the retirement phase
SMSF members in (or about to enter) the retirement phase could consider setting up a second SMSF as a tax-free pension account for their high-growth or high-income-producing assets. Up to $1.6 million of their assets could be transferred to this pension account. Their other assets could remain in their existing SMSF in an accumulation account (where earnings are generally taxed at 15%).
For example, shares could be placed in one SMSF and property in the other. There is no restriction on tax-free pension account earnings or the capital growth of assets that support this account. The sale of assets supporting a pension account are also generally capital gains tax (CGT)-free, unlike the sale of assets supporting an accumulation account.
This strategy of setting up a second SMSF could maximise the overall super benefits for members, as the tax-free pension account balance could grow faster than the taxable accumulation account balance.
The alternative for these members is to leave all their assets in a single SMSF. However, because different assets can no longer be segregated between pension and accumulation accounts, their high-growth or high income-producing assets will attract an accumulation account tax obligation. All investment earnings in a single SMSF are aggregated and assigned proportionally to the pension and accumulation account balances.
2. When the SMSF has two generations of members
Setting up a second SMSF can also potentially be a suitable strategy for SMSFs that have two generations of members (such as parents and their adult children). These funds are more likely to have members that include both eligible retirees (parents) with pension accounts and current members of the workforce making contributions to their accumulation accounts (the adult children).
For example, consider a single SMSF that has four members: two retired parents and two adult children. Prior to the legislative changes that were introduced on 1 July, 2017, the capital gain on the sale of any fund assets (such as an investment property) could be fully assigned to the parents’ pension accounts to avoid any CGT liability for the adult children.
However, from 1 July 2017, assets held in a single SMSF are deemed to be held by all fund members. The adult children would therefore pay a proportion of the CGT payable on the sale of the investment property asset in this example. The CGT rate would be 10% if the asset had been held for 12 months or more, or 15% on any assets held for less than 12 months.
What are the potential benefits of running two SMSFs?
1. Tax savings
Since the 2017 legislative changes, segregating assets with high income or high capital growth potential into pension accounts is now only possible via setting up a second SMSF.
2. Estate planning
Setting up a second SMSF can facilitate the smooth transfer of different assets to different beneficiaries when a member dies. For example, transferring different assets to spouses or children. This can help to avoid disputes over the distribution of SMSF funds.
3. Isolating risk
Setting up a second SMSF can allow higher-risk investments to be isolated. This can be important when other SMSF assets need to be protected from any claims. For example, if the SMSF owns property, setting up a separate SMSF for this asset class can protect other SMSF assets from any public liability claims for injury or loss (if there is no or inadequate public liability insurance cover).
4. Minimising SMSF operating disagreements
The potential for SMSF members to have disagreements about how a fund operates can be reduced by setting up a second fund for specific assets or for member pension accounts.
What are the potential downsides of running two SMSFs?
1. Fund establishment and maintenance costs
Having two SMSFs means you’re up for two sets of administration costs, in addition to the cost of setting up the second fund. The benefits need to outweigh all the additional costs. It’s best to seek independent professional advice before making a decision.
Set-up costs could include CGT liability on the transfer of assets from the existing SMSF to the new fund. Stamp duty may also be payable on these transfers, depending on the type of asset and the State or Territory where the transfer occurs.
2. Increased Australian Taxation Office (ATO) scrutiny
SMSFs must pass what is known as the sole purpose test. This means that any SMSF must be set up and maintained for the sole purpose of providing benefits to:
- members upon their retirement, or
- member beneficiaries upon their death.
Setting up a second SMSF will attract ATO scrutiny to ensure that it complies with this sole purpose test, rather than being set up primarily to minimise tax or as part of an illegal tax avoidance scheme. SMSFs that don’t pass the ATO’s sole purpose test can attract fines and/or be disqualified from operating.
It’s legally possible to run two SMSFs and there are both potential benefits and downsides to pursuing this strategy. Whether or not setting up a second SMSF is a good option depends upon your individual circumstances. It’s best to seek independent professional advice for your specific situation before you make a decision. The information contained in this article is general in nature.