|Summary: This article provides answers on maximising contributions before next week’s budget, the costs of corporate trustees, passing super to non-dependents, indexation on benefits, franking credits and overseas income under the proposed super rules, using super to buy a family dwelling, and calculating the 45-day holding period.|
|Key take-out: Income earned from a foreign pension must be included on your personal income tax return, but has no effect on the income earned in a SMSF pension account.|
|Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.|
Should non-contributions be maximised before the budget.
Do you think that the $150,000 non-concessional limit could be reduced to something like $50,000? Maybe this financial year is the last year people will have the ability to bring forward the next two years’ limit and contribute $450,000. So should people act before the Budget in May?
Answer: I have not heard of any plans to reduce the current non-concessional contribution limits are scrap the three-year rule. This, of course, does not mean that the government is not considering doing this. If you are at all worried that this could be on the government’s agenda, and you have not made any non-concessional contributions in excess of the $150,000 in the previous three years, consider maximising your contributions before next Tuesday, being budget night.
What are the costs of setting up a corporate trustee?
Can you outline broadly the costs associated with changing an SMSF trust deed from individual trustees to a corporate structure? Is there a minimum amount threshold in the SMSF that you would recommend before making the change?
Answer: There are two main costs associated with changing the trustees of an SMSF from individuals to a company. The first relates to the formation of the company, which costs approximately $800. The second is the changes that need to be made to the trust deed, and this will cost approximately $200.
If you are doing all of the organising yourself there should be no extra costs, however if your accountant is assisting with this there would be some extra costs related to the work they do. There is no real minimum amount that an SMSF should have in funds before considering changing from individual trustees to a company. The main point to consider is whether it is better to go through the trouble and costs now, or have the worry and administration at the time of one of the members dying.
What are the tax treatments for passing super to non-dependents?
You suggest that there would be 16.5% tax payable on superannuation passing to non-dependents upon the death of a member. I understood there was a different tax treatment for the tax-free (non-concessional) and concessional components of the balance. Is this not the case? If not, what is the benefit of the “withdraw/recontribute” strategy for increasing the tax-free proportion?
Answer: You are right, the person’s superannuation can be made up of both taxable and tax-free superannuation benefits. Tax-free superannuation benefits per dollar of income from non-concessional after-tax super contributions. There is no tax payable on tax-free superannuation when it passes to non-dependents. This is why the re-contribution strategy, converting taxable super to tax-free super does work.
How can the non-indexation of health care benefits be addressed?
I recently sent you an email asking about the fact that the upper limit of allowable income for eligibility for the Health Care /Pharmaceutical card has not been indexed from $50,000 for years. How could this be addressed? Everything else is indexed, including the supposed $100,000 limit for SMSF taxable income.
Answer: Unfortunately there are many limits that have been put in place that are fixed and do not increase with indexation. An example of this is the $500,000 small business capital gains tax retirement exemption. Unfortunately the government uses fixed limits that do not increase in line with inflation as a stealthy way to effectively increase taxes and reduce access to benefits. My only suggestion is that you write to local Federal member and voice your concerns.
Will franking credits be counted under the proposed super tax changes?
My SMSF is in pension mode and I receive a substantial amount of franking credits each year. I have seen a number of references to franking credits in various reports on the superannuation changes but I am still not clear whether they contribute to the $100,000 tax threshold or not. As these credits were introduced to avoid double taxation I would have thought they would not have been considered, but I would appreciate if you could clarify this for me.
Answer: When an SMSF burns fully franked income the amount of the cash dividend received plus the franking credit received is shown as income. This means that if the Gillard Government’s policy of taxing superannuation fund accounts in pension phase that earns more than $100,000 income in a year becomes legislation that tax would effectively be applied to the franking credits received. Franking credits are included as income because they can result in a tax refund for an SMSF.
Will overseas income be included under the proposed $100,000 earnings tax change?
My husband and I are Australian citizens and residents but receive lifetime annuities from overseas, which are currently fully taxed at our marginal tax rates, apart from a small deduction based on the undeducted purchase price of these annuities. Under the proposed new rules, would the taxation of our overseas annuities remain the same?
We have also established a DIY super fund here in Australia. Would the “earnings” from our overseas funds – we do not know what these are as we do not receive them – be added to the earnings of our DIY fund in determining our overall earnings above the $100,000 limit?
Answer: Under the proposed policy the $100,000 relates to the income earned on an individual’s pension superannuation account within an Australian superannuation fund. The income you earn from your foreign pension must be included on your personal income tax return, but has no effect on the income earned by you in your pension account in your SMSF.
Can my fund buy my daughter’s unit?
My daughter is in a unit she owns and is in the process of selling it to move to a bigger house due an addition to the family. I would like to buy it outright at market value from my pension fund of the SMSF, which I jointly hold with my wife. The unit will then be part of my portfolio and will be rented properly at market value through an agent to a third party unrelated or known to us. The rent will be credited to our SMSF as an income. Am I doing this within the rules of the SMSF?
Answer: There is a specific ban on superannuation funds buying assets and investments from members and related parties. The only exceptions to this rule are publicly listed investments, such as shares, and commercial real estate property. Your daughter would be regarded as a related party of yours, which means that your SMSF could not buy the unit she owns.
It would not matter if a market valuation is obtained for the unit and the market rent that needs to be charged, and that the unit will be left through an agent to an independent third party. If your SMSF purchase the unit you would be in breach of the investment rules and would be forced to either dispose of the unit or could be classed as a non-complying fund. When this occurs the income and all of the assets of the fund has tax levied on it at 46.5%.
When is the 45-day holding period calculated from?
When you purchase shares, is the 45-day holding period calculated from the date the shares were purchased or the settlement date?
Answer: According to the ATO, when calculating the 45-day holding period you should not count the day on which the shares are purchased and the day on which they are disposed. This in a practical sense means, taking into account that the shares must be purchased on day one, that to meet the 45-day rule the shares could not be sold until after day 46.
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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