Super rollovers in negative markets

Advisers looking to provide advice to consolidate a client’s superannuation benefits held with different funds, perhaps in preparation to commence a retirement income stream, may wish to stop and consider each benefit’s underlying tax components prior to making any rollover recommendations.

Depending on how recent negative returns have impacted those tax components, the taxation of the client’s final benefit could vary substantially depending on which fund is rolled over to where.

How do investment returns impact superannuation tax components?

To understand how investment returns impact the tax components of a superannuation interest, it is important to briefly review the proportioning rules to clarify how and when the tax components are required to be calculated for different types of benefits.

These are summarised as follows.

- Whenever a superannuation benefit is paid (including rollover superannuation benefits), the proportion of tax-free and taxable components of the total underlying superannuation interest must be determined immediately prior to the benefits being paid.

Note: Tax-free component = so much of super interest as consists of crystallised segment plus contributions segment. The crystallised segment of a super interest is a fixed dollar figure based on the June 30, 2007, value of the following components: concessional component + post-June 1994 invalidity component + undeducted contributions + CGT exempt component + pre-July 83 component.

Taxable component = total superannuation interest — tax-free component. The contributions segment of a super interest consists of contributions made after June 30, 2007, to the extent that they have not been included in the assessable income of the superannuation fund — that is, non-concessional contributions.

- The proportion of tax-free and taxable components of the superannuation interest must then be applied to the benefit payment to determine its tax components.

- For pensions, the proportions are locked in when the pension commences and apply to all income payments and lump sum commutations, including rollovers.

Taking these rules into account, investment returns effectively impact the tax components of a superannuation interest in the following ways:

• for interests in the accumulation phase — investment returns generally only increase or decrease the value of the taxable component. This happens by default as the taxable component is defined as what is left over after deducting the tax-free component from the total super interest. Where negative returns have reduced the taxable component to nil they will then start to reduce the tax-free component; and
• for interests in the pension phase — as the pension’s proportions are locked in at commencement and apply to all future income and lump sum commutation payments, investment returns will effectively impact both tax components.