I was asked a simple question recently.

An SMSF has 2 members, one has been wholly in pension since July 1 and the other in accumulation. The accumulation member intends to convert their whole balance to a pension from 1 January. Shortly after, the fund will sell several assets with significant capital gains. Will those gains be assessable? The quick answer is no on the basis that 100% of the SMSF will be in pension at that time – but is that correct?

If all members of the fund are in pension for the whole of the year, then all of the fund’s income, including assessable capital gains, is exempt current pension income and there is no tax to pay.

If all the members are not in pension phase for half of the year but 100% in pension for the remaining half, as per this question, then by applying the segregated method the income during the period when the SMSF was entirely in pension would be tax exempt while an actuarial certificate would be required to determine the tax payable for the first half of the year. As the gains are to be realised in the second half of the year, they would be exempt.

The complication is that this would only apply if the segregated method can be used. If it can’t, an actuarial certificate would need to be applied to the whole year which would result in half of the income for the whole year being assessable which would include half of the assessable capital gain.

How do you know if you can use the segregated method? The SMSF CANNOT use the segregated method if ANY member has

• A total super balance of more than $1.6m at the previous 30 June AND
• A retirement phase pension in any fund

Note that the total super balance test is $1.6m, not the $2m you might expect.

If the SMSF cannot use the segregated method and the asset sales can be delayed to the following 1 July then, if the SMSF remains solely in pension for the whole year, the 100% tax exemption will apply. Even if the fund subsequently included an accumulation account, perhaps due to a contribution, the exempt actuarial % would still be much higher as the vast majority of the SMSF would have been in pension for whole year.