Exercise caution with rollovers in market downturn, advisers warned
Rollovers of super accounts for clients impacted by negative returns should be approached with caution, as advisers may potentially risk permanently reducing the client’s tax-free component, warns Colonial First State.
In an online article, Colonial First State executive manager Craig Day explained that negative investment returns cannot only impact a client’s super balance, but also the tax components that make up the balance of an accumulation account.
Mr Day explained that due to the way tax components are calculated, generally only the value of a member’s taxable component fluctuates with investment returns.
“This happens by default as the taxable component is simply calculated as what’s left over after the value of the tax-free component has been determined,” he said.
However, one important exception to the rule, he noted, is where negative returns decrease the value of a member’s account balance to an amount that is less than the value of their tax-free component.
“In this case, given the tax-free component cannot exceed the actual account balance, negative returns cause a reduction in the value of the tax-free component,” he said.
“However, it’s also important to note that subsequent positive returns, or concessional contributions, can increase the value of a member’s tax-free component back up to previous levels, to the point where the member’s balance equals the value of their tax-free component.”
This means that where a member has suffered negative returns that have reduced the tax-free component, Mr Day said careful consideration should be taken before recommending rollovers, withdrawals or contributions, as there may be opportunities to increase their tax-free component to previous levels.
“For example, where a member transfers a benefit from one super fund to another via a rollover, the rollover fund will be required to notify the receiving fund of the amount of taxable and tax-free component included in the rollover,” he explained.
“The receiving fund is then required to include the amount of tax-free component included in the rollover in the calculation of the member’s contributions segment in that fund.”
As a result, a rollover could have the impact of locking in any reduction in the member’s tax-free component due to negative returns, he warned.
“It is also important to note that making deductible contributions could effectively increase the value of the member’s tax-free component where it had previously been reduced by negative returns,” he said.
Miranda Brownlee
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.
