DBA Lawyers senior associate William Fettes said the total superannuation balance is one of the most important concepts introduced as part of the major superannuation reforms, and that accounting methods, such as tax effect accounting, can have an impact on the balance amount.
Mr Fettes said tax effect accounting is optional for SMSFs, and many SMSFs do not apply it, as SMSFs are generally not reporting entities.
“Tax effect accounting can be a prudent accounting policy that you might consider adopting, and one of the things that it can facilitate is the ability to recognise deferred tax liabilities where there is some reasonable certainty that a future tax liability will arise at the fund level,” he explained.
For example, tax on a net capital gain where the fund will not be in retirement phase, or tax when a ‘deferred notional gain’ is brought to account.
Mr Fettes explained how tax effect accounting can operate with an example of a two-member fund, where both members have equal account balances.
“The SMSF trustee uses the proportionate CGT relief to reset the cost base of a rental property to its market value of $1 million. Now the property had an original cost base of $250,000 and the SMSF trustee elects to defer the notional gain,” he said.
“We have our capital gains, we’ve got the one third discount, and then we need to think about the non-exempt portion. Let’s suppose it’s 50 per cent in pension phase, therefore, we’d have $250,000 that we’re dealing with and that is our deferred notional gain. We’re looking at a potential deferred tax liability of 15 per cent of that, which is $37,500 and obviously that’s split between two members. So we can see an illustration of the difference in using tax effect accounting.”
Without tax effect accounting, the total super balance of each member would be overstated by $18,750 each, he explained.
“Therefore, clients and advisers may wish to consider tax effect accounting as a conservative approach to ensure they do not overstate members’ total superannuation balances,” he said.
