|Summary: This article provides answers on pension payment rates, personal deductible contributions, corporate trustees, pension conversions, and capital gains tax.|
|Key take-out: Even if a person has two residences, they can only ever have one main residence and receive the CGT exemption for this.|
|Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.|
Clarifying minimum pension payment rates
My wife and I have our own SMSF and have approximately $1 million in the fund. I have turned 65 and am working very much part-time, while my wife is 61, self-employed in the rag trade, with no intention to retire for a few years. I have two-thirds of the total assets of the SMSF.
What is the actual percentage I need to draw as a pension under the Act? The ATO website seems vague. I have seen mention of “special” rates that apply at this time. Is the minimum pension rate based on the opening value of my balance at end of the 2012 financial year? Has anyone written a good manual on administering an SMSF in retirement? I have worked hard for my money and resent having a planner taking 1% to divulge a few facts that the ATO should publish readily.
Answer: The minimum pension payment rates depend on the age of the superannuation member at the start of each financial year, or when a pension is started. Currently the minimum pension rates are as follows:
- 4% for a member aged 55 to 64;
- 5% for a member aged 65 to 74;
- 6% for a member aged 75 to 79;
- 7% for a member aged 80 to 84.
Due to the GFC the government has applied a discount to the minimum pension payable. For the 2012-13 year, a discount of 25% applies. As you will be 65 at the start of the 2014 financial year, and there has been no mention of the discount applying for that year, you would need to take a minimum pension of 5% of the balance of your superannuation account at July 1, 2013.
If you have been taking a pension since July 1, 2012, and you were 64 at that time, the minimum pension that would need to be taken by you is 3%. This minimum pension rate would be applied to the value of your superannuation pension account at July 1, 2012.
I understand when you voice your resentment to paying 1% per annum to a financial adviser who does very little to earn this fee. There are superannuation advisers that do offer ongoing superannuation, investment, and strategic advice on a fee-for-service basis.
I wrote a book in 2009 called, “Self-Managed Super Funds – A Survival Guide” that has a lot of the information and guidance that you are seeking. Due to legislation changes since the book was published some parts of it are now out of date. I am currently working on a membership-based website for SMSF trustees that will provide you with the help and assistance to better administer your SMSF.
Making personal deductible contributions to a superannuation fund
My 50-year-old wife resigned from her job in July last year and has not worked since. During this financial year she will have $100,000 to $200,000 of investment income (dividends, interest, capital gains) from our share portfolio, but only 1-2% of her income will be from her previous employment. Can she make a concessional contribution to her super fund to take her concessional contributions for the year up to $25,000?
Answer: For a person to be eligible to make personal deductible contributions to a superannuation fund they must pass one of two tests. Your wife would not pass the first test, which requires a person not to be eligible to receive employer sponsored superannuation contributions. As she worked in July she would have been eligible for some contributions for that period of employment.
From what you have described your wife will, however, the pass the second test. Under this test, where a person’s employment income is less than 10% of their total assessable income, they can make a deductible self-employed super contribution. Before your wife makes the contribution she should assess how much was contributed by her employer and then contribute a self-employed contribution so her total contributions are less than $25,000.
Using a corporate trustee for non-trustee investment activities
Is it legitimate for a corporate trustee to partake in non-trustee investment activities (e.g. property management), which are outside and additional to its SMSF trustee functions provided that the company’s memorandum and articles permit such?
Answer: You could use the corporate trustee for the SMSF to do other things, such as carrying on a business, but most people regard this as not being advisable. When a company acts in another capacity this could be put it at risk if something goes wrong. If this occurred and the company was put into liquidation, a new trustee would have to be found for the SMSF.
In addition, where the company acts purely as a trustee for an SMSF, if it has been set up correctly, it pays a lower annual review fee of $43 a year. This annual costs can be decreased when the super fund pays 10 years’ in advance. In this case the cost comes down to $32.40 a year. These companies are called special-purpose companies. To qualify, the constitution of the company must prohibit distribution of the company’s income or property to its members.
Pension conversions and tax-free income
If I convert a fund to a transition to retirement income stream now will the income of the fund be tax-free for the whole year or just what is earned after the conversion date?
Answer: The income of a superannuation fund, where the assets are used to fund a pension, is currently tax-free. This means by simply putting a superannuation fund into pension phase partway through a year does not mean that the fund pays no tax on any income earned for the whole year. The only tax-free income will be what has been earned while the fund is in pension phase.
Concessional super contributions for over 75s
Will persons aged 75 years and older, who can satisfy the work test, be able to make concessional super contributions from July 1?
Answer: The new rule applies from July 1, 2013 and only relates to compulsory employer SGC contributions. It will not apply to self-employed concessional contributions or non-concessional contributions. This means the age limit of 75 still applies.
Concessional and non-concessional contributions
I have just started an SMSF and am rolling over various other super funds into it. This year I will earn about $120,000 in interest, dividends and salary (no compulsory super as self-employed contractor) but will not pay any tax due to a carried forward loss. I am 48 and will be likely paying the maximum marginal tax next year. In starting the SMSF before rolling other funds into it, I kicked it off with $50,000 in cash. Should I claim $25,000 as a concessional contribution or leave it all as an after-tax contribution?
Answer: There is no point in making some of the non-concessional contribution a deductible concessional contribution. This is because you would be paying tax at 15% in your SMSF and, due to the carried forward losses, not be saving any tax in your personal tax return.
Changes in ownership and capital gains tax
I am about to start my SMSF, valued at $200,000. I have some shares getting up to the same levels in recent months. I would like to sell the shares to help upgrade my house but don't want to take the CGT hit. Can I sell the shares to a SMSF and avoid CGT on the sale of the shares?
Answer: Whenever there is a change of beneficial ownership, such as selling or transferring shares into an SMSF, capital gains tax would be payable.
Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.
Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.
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