Ask Max: Property, Employment, SMSFs and death

Buying property through an SMSF, being employed by your fund, and what happens to my fund'€™s assets when I die?

PORTFOLIO POINT: Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. Each week he draws upon this experience to answer the questions of Eureka Report members.

This week:

  • Should I buy land through my SMSF?
  • Can my super fund employ me?
  • Should I appoint another trustee?
  • What happens to my SMSF assets when I die?
  • Withdrawing your super balance
  • Capital gains tax on property investments.

Buying land through a SMSF

My partner and I are considering buying a block of land in regional Victoria where we hope to live come retirement, which is about 10 years away. We have an SMSF and on current planning thought perhaps we should consider buying the land within the SMSF. In reality, we’re not really across the advantages or disadvantages of doing it this way.

It is our intention to build our retirement home on the proposed land. Whether we do that before actual retirement or at retirement remains to be seen. We would be interested in hearing from you regarding the pros and cons of carrying out the proposed purchase within the SMSF?

Depending on where you live there could be a risk with this strategy of paying stamp duty on the property twice. Once when the super fund buys it and then again when it transfers to you on retirement. Also because in-specie lump sum payments cannot be made as part of a pension, your SMSF could pay capital gains tax when the property transfers.

You might get a better result, depending on your financial, tax and cash flow position, if you bought the land in your own names. You could then borrow to build a house and rent it out until you wanted to move into it. Before taking any action in relation to your plan you should seek advice from a fee for service professional that specialises in retirement and tax planning.

Can my super fund employ me?

I will be 55 in a few months time and will be eligible to activate pension mode from that time. Please tell me how my super fund can employ me?

Your super fund cannot employ you unless it is to perform duties that you would normally engage someone else to do, and you are qualified to perform those duties. If you are starting a transition to retirement pension your fund will need to register for PAYG withholding tax.

I am thinking to change my SMSF individual trustee to a corporate trustee. Do the shares in my current portfolio have to transfer to the corporate trustee name in six months? If not, how long can I hold it under the existing name?

There is no timeframe set out in regulations for having to transfer the ownership of the shares into that of the new corporate trustee. As long as you don’t take too long there shouldn’t be a problem. You should check with the accountant or auditor who prepares your SMSF’s statements.

Appointing SMSF trustees

We have a self-managed superannuation fund in my wife’s name with me as trustee. We are both retired and my wife draws a pension that is paid monthly. If one of us dies does this affect the current arrangement?

With you both acting as individual trustees you will either need to appoint another trustee now or when one of you dies, or appoint a company to take over as trustee. If your wife dies first you can be paid a death benefit pension so nothing would change except you would become a member.

What happens to my fund assets when I die?

I am the only member of my SMSF with a corporate trustee. I am also the only director of a trustee company. Part of my SMSF’s investments are in shares and bank deposits. What is going to happen to my SMFS investments tax wise when I die? What actions would be expected from the executor of my will in respect to the SMSF’s administration or closure? I have no dependants or family members.

Unless you appoint a second director your executor would assume the responsibility of your directorship of the trustee company. As you don’t have any dependants the investments in the SMSF will be sold and capital gains tax could be payable on your shares. Once the fund has been converted to cash it would be paid to your estate. Tax of 16.5% would be payable either by the estate or by the person receiving the taxable value of your superannuation.

Should I withdraw all my super?

I am just wondering if I was to withdraw the full amount from my super fund then how does this affect my pension payment?

Your entitlement to the age pension depends on passing both the assets test and income test. If you draw all of your money out of super and put it in the bank the value withdrawn will still count as an asset and therefore by doing this nothing is achieved.

In fact because of the way income is calculated under the income test and the deeming provisions you will more than likely be worse off by taking the money out of super. Under the income test a single pensioner can earn up to $150 a fortnight and a married couple earn up to $264 a fortnight and still receive the full pension.

For every dollar earned over these limits the single pension decreases by 50 cents a fortnight and 25 cents a fortnight for a couple. Financial assets, such as shares and bank deposits, are deemed to earn income and this is counted under the income test. An earning rate of 3% is applied to the first $44,600 of financial assets for singles and $74,400 for couples. Financial assets over these limits are deemed to earn 4.5%.

A pension received from a super fund is treated differently from financial assets. Not all of the pension received is counted under the income test. A deduction is allowed for the purchase cost of the super pension. This is calculated by dividing the value of the member’s super account at the time the pension is started by the member’s life expectancy when they start the pension.

Before taking all of you money out of your super fund you should seek professional advice to make sure you will not be worse off.

What capital gains tax am I liable for?

I have an investment townhouse, which I purchased 10 years ago to initially live in. The purchase price was $170,000. It became an investment home after two years of owner occupation as I purchased another home to reside in. I had a valuation completed on the townhouse at this time, giving me a value of $260,000 on the property after I moved out. I am considering selling the townhouse as I am not currently working. What capital gains tax and other stamp duties etc would I be liable for? I do not have another owner-occupied home in my name as we live in my partner’s house.

As you purchased your house after August 20, 1996 you must use the valuation method for calculating your capital gain. This will mean capital gains tax is payable on the difference between what it is worth now and the $260,000 that it was worth when you started renting it. Because you are not currently working this would be a good time to sell it due to how capital gains tax is calculated.

Assuming the townhouse is now worth $400,000 this would result in a profit made on the sale of $140,000. As you have held the property for more than 12 months this profit would be reduced by the 50% general exemption, resulting in a taxable capital gain of $70,000. This gain is added to any other income you earn for this 2013 year and tax is paid at the applicable marginal tax rates.

It is my understanding that no stamp duties should be payable by you as they are normally paid by the purchaser. You should seek professional advice before June 30, 2013 as you may be able to decrease your capital gain further. One possibility would be to make a deductible self-employed super contribution.

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.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au