Multiple Superannuation Accounts

1. Introduction
2. Streaming with 2 SMSF’s & 2 separate accumulation interests to save tax
3. Streaming with 1 SMSF using Savings to make a contribution
4. Streaming with 1 SMSF – withdrawal & re contribution strategy < 60
5. Other Strategies

Introduction

A members superannuation funds are actually made up of different components with different tax treatments. Accordingly understanding these differences can result in tax savings to a member when make additions deduction from these components. Prior to 1 July 2007 a member could ‘cherry pick’ to a certain extent as to what components to add and withdraw, however this flexibility has largely been removed (except to the restricted application using Separate Super Interests) with what is referred to as the proportioning rule.

To understand the use of multiple accounts to create a tax effective strategy you need to understand the following first:

1. The Proportioning rule
2. Separate super interests; and
3. The Conditions Of Release

Streaming with 2 SMSF’s & 2 separate accumulation interests to save tax

If you are over your preservation age, let’s say your 55, and you wish to withdraw funds from your super the amount you withdraw must comprise an even proportion of the different components.

Therefore it would be advantages to have 2 SMSF’s, one separate superannuation interest for the non taxable super and the other SMSF for the taxable superannuation interest.

Example:  if you had $400K in Super spit between $50K in undeducted contributions before 1.7.99 <RNPB>and the remaining $350K was > 30.6.99 – deductible contributions <PB’s>, then if you had rolled the undeducted contributions from your public offer fund into one SMSF and the other $350K into another, then you could withdraw the $50k superannuation interest assuming you meet a <condition of release> and pay no tax. Unfortunately the cost of running to two SMSF’s becomes prohibitive unless the amount of the superannuation interests justifies this strategy. However a strategy normally implements a number of initiatives which together when the numbers are crunched may result in two SMSF’s being justified. For example future non concessional member contributions and spouse contributions could be contributed to the $50K balance ensuring that any future concessional contributions by either member would be contributed to the other SMSF.

Streaming with 1 SMSF using Savings to make a contribution

If you are over your preservation age, let’s say your 56, and you wish to withdraw funds from your super, if the fund comprises <PB’s> you first need to <meet a condition of release> the amount you withdraw must comprise an even proportion of the different components according to the proportionate rule.

Therefore it would be advantages to have a separate superannuation interest for the non taxable super and a different superannuation interest for the taxable superannuation.

EXAMPLE:  if you had $400K in Super spit between $50K in undeducted contributions before 1.7.99 and the remaining $350K was PB’s and as you only have one SMSF and therefore one superannuation interest , then 88.88% is taxable and 11.12% is tax free. Then lets say you retire and you have savings arisen from a deceased estate/sale of business of $350,000 and you wish to contribute the $350K to your SMSF. If you simply made an non concessional contribution then you would change your tax free and taxable percentage to 50% respectively. This would eliminate streaming.

However if you had commenced a pension with the $400K (comprising 88.88%/11.12%) and then made the non concessional contribution from savings of $400K, as an accumulation interest canniot be added to a pension account, a second pension would be commenced (pension 2), ie two superannuation interests, the second would be 100% tax free. This has two advantages:

1. Earnings on a pension interest are allocated to the tax free and taxable portions at the commencement of the pension. Therefore all future earnings would form part of the tax free portion. Earnings on a Accumulation Interest always form part of the taxable portion. Therefore as soon as the non concessional contribution is made it is wise to convert it to a pension immediately. There is the additional benefit of course that earnings on pension assets are tax free while in pension phase.
2. Any lump sum payment to a non dependant beneficiary from a death of a member could be paid from the non taxable pension tax free in the hands of the beneficiary, which otherwise would have been taxable in the hands of the beneficiary.
3. If your under 60, as in our example, then you would be taxed on the pension withdrawal. However provided you make the payments from the superannuation interest that is tax free, now tax would be payable on the withdrawal.

The above strategy shows how timing and conversion to a pension at the right time can create a tax free pension for the life of the pension!

Streaming with 1 SMSF – withdrawal & re contribution strategy < 60

Your can withdraw tax free a lump sum after meeting a condition of release when you are under 60. Lets say you reach your preservation age (say 55) and you have ceased employment and notified the trustee (yourself) of your retirement. To understand what retirement means click here. The lump sum you can withdraw that is tax free is capped and indexed to the CPI, currently it is $165K for the 2011-2012 year. The $165,000 you withdraw is tax free regardless of the tax free and taxable portion. Accordingly in the Previous Example 88% of the $165K would still be tax free even thought it comprises a taxable portion.

The strategy now is to commence a pension with the remaining ABP of $285K hich will lock in the 88.88 and 11.12% taxable and tax free proportions for the pension. Then re-contribute that $165K back into the SMSF. Now is a good time to contribute and additional savings into the SMSF as a non concessional contribution, however if you don’t have surplus funds then commence a second pension with the $165K. Congratulations, you have just created a 100% tax free pension for your entire life! with no additional funds required!

Even if you haven’t retired you could still make a lumpsum withdrawal if your super contains <UNBP’s>. To do this by making an election to partially commute their UNPB’s. This commuted amount is treated as a lump sum benefit and therefore can access the lump sum cap given you are below 60 years of age. This is possible not withstanding that your super contains taxable and tax free components, PB’s, RNPB’s UNPB’s . This strategy avoids the need for retirement, however your records need to be in good order to determine your UNPB’s.

If your under 60, as in our example, and you re-commenced work and continued to draw a pension using a TRIS (transition to retirement income stream) then you would be taxed (max 31.5% after <15% rebate>) on the pension withdrawal on the taxable component with only 1 superannuation interest. However with 2 superannuation interests after the re-contribution strategy, provided you make the payments from the superannuation interest that is tax free, Nil tax would be payable on the TRIS pension withdrawal.

If you’re over 60 then the cap does not apply to you, you can withdraw as much as you want and re contribute but where you reach 65 years of age you need to satisfy the <work test> to make a contribution.

Other Strategies

Other Streaming Strategies can be employed once you understand the concepts in this section, for example streaming the separate taxable super interest as a lump sum death benefit to the tax dependant (eg a spouse), to read more click here. This leaves any further lump sum benefits to be paid to non tax dependants from a tax free source or increased tax free source thus reducing the tax liability.