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Tax affect accounting the new norm for SMSFs

Feb 20, 2019, 15:03 PM
The new balance threshold introduced in recent super reforms is behind a push for SMSF service to change the way member balances are calculated, according to Australia’s largest SMSF administrator, SuperConcepts. 

Speaking at the SMSF Association national conference in Melbourne, SuperConcepts General Manager of Education and Technical Services Peter Burgess, said many SMSF service providers are having to change the way they have historically calculated and reported a member’s account balance on the SMSF annual return as a result of the new measures.

“Prior to the super reforms, it didn’t really matter what method was used to calculate the member’s balance for the purpose of reporting that value in the SMSF Annual report. As long as it reflected market value in the accounts the requirement of SIS Regulation 8.02B would be satisfied,” said Mr Burgess.

“However, the member balance which is reported on the SMSF annual return is used to determine, among other things, a client’s eligibly to make catch-up concessional contributions, non-concessional contributions without triggering an excess and the new work test exemption for clients over age 65. And it’s clearly in the client’s best interest for a lower value to be reported.

“In the past it has been common practice for SMSFs to ignore unrealised capital gains tax when reporting a member’s balance on the SMSF annual return. However, I think this approach is likely to change and we will start seeing more service providers ‘switching on’ tax affect accounting at least for the purpose of bringing to account a provision for deferred income tax – in other words reducing the member’s closing balance by the amount of any unrealised capital gains tax.

“Technically a provision for deferred income tax is a liability so service providers are able to reduce a member’s reported balance by the amount of any unrealised capital gains tax and still satisfy the requirement that the member’s balance reflects market value,” Mr Burgess said.

Mr Burgess also said that one of the changes that went virtually unnoticed in 2018 was the inclusion of several new labels on the SMSF annual return. 

“The inclusion of labels ‘X1’ and ‘X2’ is really an acknowledgment by the ATO that the member’s closing account balance as reported at label ‘S’ will on occasions lead to the member’s TSB being overstated,” he said.

“This is because the member’s closing balance is required to be calculated using market value, but all that needs to be included in the member’s Total Super Balance is the amount the member would receive if they voluntarily withdrew their benefit today – which is net market value. The difference between the two is often disposal costs," Mr Burgess said.

“So if you have a client who’s fund is likely to incur substantial disposal costs if they left the fund and they are pushing up against one of those important Total Super Balance thresholds which matters to them, estimate what the disposal costs are likely to be, say, 2 per cent of the asset value or whatever is appropriate, and use label X1 or X2 to report the member’s balance net of the disposal costs. It’s an optional field but whatever is report at X1 or X2 will override the member’s closing balance reported at label S but only for the purpose of calculating the member’s Total Super Balance,” said Mr Burgess

Media contact: 
Garth Montgomery
0408 864 851