Ask Max: Your questions answered

Setting up a fund, reversionary pensions, lending money, non-concessional contributions, binding death benefit nominations, and SMSF annual accounting and audit fees.

Summary: This article provides answers on setting up a fund and transferring a property, the benefits of reversionary pensions, SMSFs lending money to another party, non-concessional contributions, binding death benefit nominations and fund membership, and whether there are set fees on SMSF annual accounting and audit fees?

Key take-out: An SMSF is banned from lending money to members and their associates, but can lend to an independent party on commercial terms.

Key beneficiaries: SMSF trustees. Category: Portfolio management.

Setting up a fund and transferring a property.

I am thinking of setting up an SMSF and rolling into it $100,000 I have in AMP. Then I will direct all of my employer super to the SMSF. Once set up, can I transfer the property which I own and pay a mortgage? If yes what is the benefit?

If the property is a commercial property it could be transferred into a superannuation fund you are a member of, however if it is a residential property this could not be done. An SMSF can also borrow to buy a property if it complies with the limited recourse borrowing conditions. The general consensus of opinion these days is that a person needs to have at least $300,000 in superannuation to make it worthwhile from a cost point of view to set up an SMSF. You should seek advice from an SMSF specialist.

What are the benefits of reversionary pensions?

My wife and I are the members of our SMSF, our accounts are both in the pension phase, and we are both over 60. In the event of death we currently have beneficiary binding nominations, each to the other. Our accountant suggested we should consider reversionary pensions but seemed vague about the process and benefits. Can you please outline the process and briefly any benefits and disadvantages?

By converting your account-based pensions to reversionary pensions this would mean in the event of one of you dying no extra paperwork or other actions would need to be taken. In this case the pension continues but ends up being paid to the surviving spouse. To convert to reversionary pensions would involve you commuting your current pensions and then starting two new reversionary pensions. If you kept the binding death benefit nominations in place the pension existing at the time of the death of the member would cease. That person’s account would go back into accumulation phase, and then a new death benefit pension could commence for the surviving member.

Are my assets sufficient to start a SMSF?

I am 58, working full-time with less than $80,000 in combined super. I also have one investment residential investment a year old, and pay interest on a home mortgage. Will this be sufficient to start an SMSF to see me through retirement? My intention is to work beyond retirement if given a chance.

You have not given me enough information to assess whether you will have sufficient funds in superannuation to last for your retirement. There are many other components that must be taken into account when assessing this. You should seek advice from a fee for service advisor that specialises in retirement planning strategies instead of one focused on selling investment products.

Can a SMSF lend money to another party?

Is it legal for an SMSF to lend money? We are selling our residence and offering vendor finance to a completely unrelated party whom we have not met before. We propose to lend the buyer 90% of the purchase price from the super fund, using a first mortgage over the property as collateral.

The purchase price is the best we could do under the current market and the interest rate on the loan is matched to the Commonwealth Bank standard variable home loan rate. We regard the loan as a base load investment for the fund as we are into retirement and need some reasonable income with good security. The proceeds from the sale of the residence will be used to buy our new home. In the current market uncertainty, there must be quite a few others contemplating this strategy.

An SMSF is banned from lending money to members and their associates and also from buying property from members unless it is business real property. There is nothing stopping an SMSF lending money to an independent party on commercial terms. Before entering into the contract you should speak to the auditor of your fund to make sure they don’t have a problem with the transaction. If the purchasers of your home defaulted on the mortgage the property would be sold and any excess funds over the amount owed to the super fund would have to be paid to your purchasers.

Are non-concessional contributions shown on a tax return?

My brother-in-law is self-employed. He has a SMSF with my sister, who is the main income earner. His business makes very small profits. In 2010-11 and 2011-12 he made personal contributions of $1,000 and $2,600 respectively. On checking his tax returns I can see that his tax agent has shown $0 for personal (non-concessional) contributions for both tax years.

I'm thinking this is the reason he has not received a government co-contribution. My sister questioned the tax agent about this and he claimed that the government co-contribution does not get reported on an individual's tax return. This does not seem correct to me. The SMSF tax returns show the personal contributions. Could you clarify the mechanism for government co-contributions being actioned?

The accountant is correct. Non-concessional contributions are not shown on an individual’s tax return; they are instead reported on the SMSF’s tax return. I’m not sure why your brother-in-law has not received the benefit of the co-contribution unless it is because his business income was not at least 10% of his total taxable income for the years in question.

Binding death benefit nominations and fund membership.

In relation to your recent answer concerning a reversionary benefit to a spouse, I am a sole member of an SMSF in pension mode and have completed a binding death benefit nomination in favour of my spouse. Does she need to be a member of the fund?

Your wife does not need to be a member of the fund to be the recipient of a binding death benefit nomination. If she is not a member steps would have to be taken if she wanted to keep the superannuation in your SMSF, rather than having it paid out as a lump sum death benefit. It would possibly be better for income tax purposes instead of having a binding death benefit nomination if you made your pension a reversionary pension that automatically passed to your wife upon your death.

Are there set fees on SMSF annual accounting and audit fees?

Is there a set figure for the annual accounting fees on a SMSF? Currently, I am paying approximately $2,500 to $3,000 for this service by my accountant. I have noticed that some online services provide the accounting/audit work for $1,000 - $1,500. I would appreciate your comments on the above.

There is no set figure for the annual accounting and audit fees for an SMSF. These can differ markedly between accountants and service providers depending on their costing structure. Costs of accounting services for your SMSF should depend on the amount of work required to complete the annual accounts and tax return. You should however be careful about the services offered by the online accounting providers. In some cases these services are cheaper because trustees are forced to use either a bank account or a sharebroker associated with the service provider. In addition, trustees can often not have the same freedom of choice when it comes to investing compared to using an accountant to provide these services.

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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