Ask Max: Trustee trauma, the work test, life insurance in SMSFs and re-contributing withdrawn funds.

Max answeres your questions on Replacing a second trustee. Meeting the work test requirements. Do I pay CGT on a property used by family members? Tax liabilities for grandchildren beneficiaries. Is life insurance in a SMSF compulsory? The advantages of putting withdrawn funds back into a SMSF.

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:

  • Replacing a second trustee.
  • Meeting the work test requirements.
  • Do I pay CGT on a property used by family members?
  • Tax liabilities for grandchildren beneficiaries.
  • Is life insurance in a SMSF compulsory?
  • The advantages of putting withdrawn funds back into a SMSF.

Do I need a replacement second trustee?

I have a SMSF with myself as sole member. The trustees are myself and my much older sister. What will happen to the SMSF management when she is no longer, for whatever reason, able to function as a trustee? I am very happy, and reasonably successful, managing the fund from an investment aspect. Will this situation continue?

Unfortunately if your older sister is incapable of performing the functions of a trustee you will be faced with three options. The first is to find another person to act as the second trustee of the fund, the second is to appoint a company to act as trustee with you being the only director and shareholder of the company, and the third would be to wind up your super fund and transfer the money to either an industry or commercial fund. You could appoint a company now to act as trustee; that would mean nothing needs to be done when something happens to your sister.

Satisfying the work test requirements

Can I meet the work test in the 2012-13 year after my SMSF fund has been converted into pension phase? I intend to make my final concessional and non-concessional contributions to the fund very early in July 2012 and then request the fund’s trustees to convert the fund entirely to pension phase. I will do the necessary paid work to satisfy the work test before my 75th birthday in October 2012. Will this meet the requirements of the Australian Taxation Office, or must I satisfy the work test before the fund is converted to pension phase?

Meeting the work test has nothing to do with whether a superannuation fund is in accumulation or pension phase. Under the work test if you are over 64, but under 75, you must work 40 hours over a continuous period of 30 days in the financial year that the contribution is made. Your plan to work in October will satisfy the work test.

Capital gains tax on a family occupied property

Some 20 years ago my wife inherited an apartment on her mother’s death. It has since been occupied by our children in completing their education and commencement of employment. As our children have now moved on, my wife wishes to sell the apartment.

We have received some advice that as the apartment has only been used by family members it may be exempt from CGT. Is this correct? If not, what are allowable deductions from the difference between the value at time of death and the sale price in arriving at accessing capital gains.

If the apartment was inherited before September 1985 no capital gains tax will be payable when it is sold. If it was inherited after September 1985 capital gains tax will be payable and it does not matter that the apartment has not been used to produce assessable income and has been occupied by family members.

The capital gain that your wife will pay tax on will be half of the difference between the cost of the apartment and the net sale proceeds that she receives. The cost of the apartment will be made up of two components. The first of these will be the purchase cost of the apartment. If your wife’s mother purchased the apartment before September 1985 the purchase cost will be its market value at the time of her death. If the unit was purchased after September 1985 the purchase cost will be the amount paid by your wife's mother.

The second component of the cost of the apartment will be its holding costs during the time of your wife’s ownership. These costs would include rates and taxes, body corporate fees, repairs and maintenance, and the cost of any improvements or alterations made to the apartment. To make sure the capital gains tax payable by your wife is minimised you should seek professional advice.

Are my grandchildren liable for tax?

My wife and I are the two trustees of our SMSF, which is in the pension phase. We have nominated each other as the reversionary beneficiary and we have also each a binding death benefit nomination with the grandchildren (all under 18 years of age) as beneficiaries. I will very much appreciate your comments on issues of taxation for the grandchildren on our demise.

As your grandchildren would be classed as non-dependents any taxable superannuation passing to them upon your deaths would have tax paid at 16.5%. One option you could consider is that upon the death of one of you is to seek professional advice to assess how much super is needed to pay a pension to maintain your lifestyle. Any excess super could then be paid either directly to the grandchildren or into a trust that they would receive at some later time.

Is life insurance in a SMSF compulsory?

Some weeks ago, Bruce Brammall had an article on SMSFs and mentioned that from July 1, 2012, it is a mandatory requirement and the responsibility of the trustee to buy life insurance for members. Are there any exceptions to this requirement?

My wife and I have our SMSF and are now both 65 years old, have no mortgage and our children are all grown up and working. Thus, there is no need for me to have any life insurance and, at our age, premiums are prohibitively expensive.

I do not know of any new legislation that requires trustees of a super fund to take out life insurance for members. I do remember that the new low-cost type of superannuation, called Mysuper, will have compulsory life insurance for members. There will be the ability however for members to opt out of this insurance within 90 days of becoming members.

Editor's note: The article by Bruce Brammall, Beating the Superman syndrome, clearly states that from 1 July, 2012, considering insurance as part of an investment strategy became mandatory.

The article goes on to say: "That doesn’t mean that trustees will have to take out insurance for members. But you will have to note that you’ve taken their potential insurance needs into account. Under the proposed legislation, trustees will need to consider the members’ insurance requirements as part of the fund’s investment strategy. Investment strategies are a legal requirement for all SMSFs. By noting in the investment strategy that insurance has been considered for members, the government is at least hoping to force you to think about it."

Putting house proceeds back into a SMSF

Three years ago we took a lump sum payment from our SMSF to pay for our current home and we have since sold our former home and have $400,000 in fixed term deposit. Is there any advantage to put this back into the SMSF? I have this year gone back to work part-time 30 hours per month, earning about $1,000 a month. Does this have any bearing on this decision? My employer is paying 9% into an Australian Super account under my name.

There can be a major benefit when it comes to the amount of age pension you may be entitled to. If you retain the term deposit Centrelink will apply a deeming rate to that deposit once you have reached age pension age. The deemed income calculated by Centrelink will be counted under the income test.

If however the $400,000 is in your super fund, not all of the pension you receive from the fund will be counted as income. This is because Centrelink allows you to decrease the pension received by its purchase price. This deductible amount is calculated by dividing the value of your superannuation by your life expectancy at the time the super pension is commenced.

You have not given me your current age so I am not sure whether you have reached the age at which you would be entitled to receive the age pension. If you are 65 or older you will not be able to contribute the $400,000 to superannuation as you will not be meeting the work test. To do this you would need to work at least 40 hours in one month in the financial year the contribution is made.

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