Finance Your Budget Ask the Expert: Switching super funds and managing capital gains tax
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Ask the Expert: Switching super funds and managing capital gains tax

Licensed financial adviser Craig Sankey answers your burning finance questions. Photo: TND
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Question: Recently, I enquired with my accountant whether switching super funds would trigger a tax. I accidentally joined a fund I thought was an industry fund but it was a retail fund, hence my wish to move to an industry fund. It was advised that as I would be selling out of the existing super fund and buying into the new super fund, there would be a capital gains tax (CGT) of 10 per cent provided I’ve been invested in my existing fund for 12 months and a higher CGT, if not.

To me, this doesn’t make sense because I would not be realising any benefit since I would not be drawing down any super. I would only be switching super funds where the funds would continue to be preserved until I retire. Following discussion with my accountant, I had a look on the ASIC website and read that one can move funds which does not incur any CGT and that moving funds can be actioned via myGov.

I would like to switch funds asap but remain prudent in case I misunderstood the written advice. As I am 58, and although I intend to postpone super withdrawals for 10 years or more, if moving super costs me a tax then that would be almost counterproductive, i.e. there would not be sufficient time perhaps to make up the loss after a move.

I would appreciate knowing definitively if someone can switch super funds from (say) a poor performing fund to a better performing fund (is it called ‘rolling-over’?) without incurring a tax penalty. Thanks Jan

Answer: That is a very interesting question that catches a lot of people out.

Some background first: Individuals who achieve a capital gain on assets held in their own name, such as shares or an investment property, have to include the capital gain on their tax return and the gain is taxed at their marginal tax rate (MTR). If the asset was held for more than 12 months, then only 50 per cent of the gain is included in their tax return.

Super funds are similar, except that funds invested in super are only taxed at a maximum rate of 15 per cent, rather than at the MTR. The other difference is that instead of only half of the capital gain being taxed if the asset has been held for more than 12 months, with super, two-thirds of the capital gain is taxed if assets are held for more than 12 months.

This is where the 10 per cent figure that you mentioned comes in – 15 per cent less the 1/3 discount is equal to a 10 per cent Capital Gains Tax rate for monies held in super funds.

How super funds apply this tax differs and can be confusing for members. The vast majority of industry super funds apply this tax at a ‘fund’ level, which means it is worked out prior to allocating individual net gains and losses to member accounts, therefore it is already reflected in your unit price.

For example, if the super fund has made a capital gain, they would make an allowance for the tax payable, less any discounts, by revising down the unit price of your investment option. For these funds, as the tax has already been accounted for, no tax is applied when you leave the fund.

In contrast, many retail funds apply this tax at an ‘individual’ level, which seems to be what is happening in your situation. Your individual capital gains made by the underlying investments within your super are being recorded against your individual account on an ongoing basis. The trigger to actually pay the gains is when you ‘rollover’ (move to another super fund), or switch from your current investment options.

Your retail fund should be able to provide you with a report on the gains and losses for each investment option. Any losses can be offset against gains, and, as stated, if the investments have been held for more than 12 months, then the net gains will be taxed at 10 per cent.

Another way of looking at it is that funds that account for this tax at a ‘fund’ level, apply it to their unit price on an ongoing basis, whereas if it is accounted for at an ‘individual’ level, the tax is not levied on your personal super account until your investments are sold, via a rollover, switch or withdrawal.

You will need to weigh up whether paying the tax now and moving to a low-cost/better-performing fund is worth it, or whether sticking with your current fund is the better option. Obviously, the recent market performance will have an impact on the amount of gains you have achieved, and consequently the amount of tax that would be payable.

As an aside, if you stayed with your current super fund until retirement, and transferred the same assets/investment option to their pension account, you may avoid paying capital gains altogether, as this tax is not payable once you start a retirement pension. However, you will need to confirm this with your current fund.

As this is a complicated topic, you may wish to speak with your super fund for them to explain how they process this tax, or speak with a licensed financial adviser.

Question: Hi. Thanks for your recent informative answer on the ‘Cash out and Recontribution Strategy’ for superannuation contributions. I have a modest $470,000 super balance and have withdrawn and recontributed $100,000. I have recently retired (again) at age 64 and am thinking of withdrawing and re-contributing $300,000. How would proportionality be applied in my case and what would the improved tax situation become?

Answer: As mentioned in my previous article, the cash out and recontribution strategy is a popular but sometimes complex strategy.

‘Proportionality’ is where you must withdraw the tax components out of superannuation in proportion to what they currently are. For example, if your current components are 25 per cent ‘tax free’ and 75 per cent ‘taxable’, then any withdrawal must be in the same proportions.

Withdrawing the tax-free component, not surprisingly, is always tax free. However, there may be tax paid on the taxable component depending on your age, and circumstances.

Upon death, the taxable component can be taxed at 17 per cent, unless the proceeds are paid to a spouse, to non-adult children, or to individuals that are financially dependent on you.

To determine the potential benefit of a $300,000 cash out and recontribution strategy, we firstly need to know what your actual tax free and taxable components are. Your super fund should be able to easily provide this to you.

Most individuals have mainly taxable components as this is where all employer SG contributions, salary sacrifice contributions, and super earnings are allocated.

You have stated that you have previously made a $100,000 re-contribution, so I will assume this is your only tax-free component for the purposes of this calculation. Therefore, your current tax-free percentage would be 21 per cent ($100,000 / $470,000).

Withdrawing $300,000 would mean withdrawing $63,000 from the tax-free component and $237,000 from the taxable component, then re-contributing it back as a non-concessional contribution, which would be allocated to the tax-free component.

The end result would be that the taxable component would be reduced from $370,000 to $133,000, a reduction of $237,000. This could mean a reduction of $40,290 in tax for your end beneficiaries ($237 x 15 per cent) upon your death.

As this is a very complex strategy, I would strongly recommend getting advice from a financial planner or your super fund before proceeding.

Craig Sankey is a licensed Financial Adviser and Head of Technical Services & Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and whilst they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.  

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