Ask Max: Your questions answered

Home loan interest deductions, reversionary pensions, new super changes and more.

Summary: This article provides answers on home loan interest deductions, converting to reversionary pensions, defined benefit schemes and the new super changes, no frills super funds, investments for grandchildren, and auditing SMSFs.

Key take-out: Trustees of an SMSF can never audit their own super fund, and an accounting firm that prepares the annual statements for the fund cannot audit the fund.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation and tax.

Deducting interest from a home loan withdrawal

I have a line of credit over my home loan. I withdrew some to pay for some private expenses. I know the interest on this is not tax deductible. If I withdraw more for my personal investments (shares) then would the interest be tax deductible? If I calculate the portion of interest for tax deduction based on the loan for my personal investment, would this be acceptable to ATO? The home loan is both in my wife’s and my name.

Answer: The tax deductibility of interest is dependent upon the purpose that the borrowed funds have been used for and not the type of loan taken out or the property used for security. If you are withdrawing funds from a loan that currently has funds used for private purposes, you could only claim that proportion of the interest relating to the amount borrowed for the investment.

As long as you can show the Tax Office how you calculated the deductible interest you should not have a problem. It is always best where possible to have one loan purely for business or investment purposes and another loan or private purposes. By doing this the investment loan only needs to have interest payments made on it, while all of the principal repayments can be made off the private loan. Where a loan is made up of both investment and private borrowings any principal repayments must be apportioned across both components of the loan.

Converting to a reversionary pension

In your column of April 19 you stated that to convert from an account-based pension to a reversionary pension would necessitate commutation and commencement of a new pension.

I have a two-member fund (myself and my wife) with a corporate trustee, established in 1992. On the advice of the company that prepares my accounts and tax return and arranges the annual audit, the fund trust deed was revised in September 2011 to reflect the various changes that had occurred since establishment.

In the fund reports up until adoption of the revised deed, non-binding death benefit nominations had been completed by both members. In the fund report for 2012 under the revised deed, both members applied to have their account-based pensions made reversionary to each other and this was so resolved by the trustee. Is there any problem with having done this?

Answer: From what you have described the method of converting from a regular account-based pension to a reversionary pension is what you have done. It appears that changes needed to be made to your trust deed so that you could take reversionary pensions from your superannuation fund. Your account-based pensions were effectively commuted and these were replaced with the new reversionary pensions.

Defined benefit schemes under the new super changes

I am a retired Commonwealth public servant. Could you please explain the manner in which the government intends to value a defined benefit pension (of say $50,000 pa) in the context of the proposed 15% tax on super income exceeding $100,000 pa? I am assuming that such pensions will be included in assessing a retiree’s total income from super.

Answer: The proposed change will only relate to the income earned on a member’s pension account in a superannuation fund. It will not relate to their individual income tax situation. Until the legislation is passed, the actual way that the new tax works will not be known especially with regard to defined benefit pension funds.

No frills SMSF funds

I am looking to start a no frills SMSF. I am currently with SunSuper and receive a transition to retirement account pension. The cash account in this fund is only returning 0.09% this quarter. I am 60, have another $300,000 outside of super and am still working. Do see any disadvantages with me using one of these no frills SMSF services such as Esuperfund?

Answer: These types of cheap no frills SMSF superannuation set-up and administration services often have restrictions placed on what members can invest in, which to some extent defeats the purpose of having an SMSF. For example, Esuperfund requires its members to open an ANZ V2 plus account to use as the bank account for the fund.

Although it does offer a wide range of other investments it does tend to recommend that members use other investment providers linked with the ANZ such as ING. Before making a decision to set up an SMSF you should seek advice from an SMSF specialist as there could be other things you could do that will improve your overall superannuation and taxation situation.

Investments for grandchildren

If you wanted to buy your grandchildren a small holding of something, what would it be? I'm talking in the tens of thousands only, and of course I'm waiting for a downturn, being busy taking profits at the moment.

Answer: If I wanted to help my grandchildren financially, and I had say $20,000 to invest, I would probably split my investment in two. To really help them long term I would open up an account with a good industry super fund and deposit $10,000 as a non-concessional contribution on their behalf. Over the years this should grow to a reasonable sum and could show them the power of super from the point of view of a long-term investment.

For the remaining $10,000 I would buy a good dividend yielding company, such as one of the banks, and use the dividends produced to either reinvest in the company or buy further shares when they get to a reasonable sum. Another option would be to invest $10,000 in either the Vanguard index Australian share fund or the Vanguard high-yield Australian shares fund.

Who can audit a SMSF?

I wanted to understand in relation to SMSFs what are the legislative requirements to audit self-managed super funds? The reason I ask is that I am an industry accountant practicing for a private business and wanted to look at setting up a SMSF between my wife and I. We have combined super of $90,000 and from what I have read the largest ongoing expense is the annual audit fee. I wanted to first understand the legislative requirement and whether a trustee can audit its own SMSF.

Answer: The first comment I would make is that having only $90,000 of combined superannuation between the two of you, unless you wanted to specifically invest directly in investments through an SMSF, that the ratio of administration costs to the value of your superannuation will be extremely high.

The regulations relating to the audit of SMSFs is getting tighter and tighter every year. One of the areas being tightened the most is the level of independence that an auditor of an SMSF must have.

The reasons why SMSFs must be audited is to provide an extra level of comfort for both the ATO and other regulators that SMSFs are being used properly. In other words, auditors are the primary check that the funds held in an SMSF are being used for retirement purposes and not for personal use or tax avoidance.

This means trustees of an SMSF can never audit their own super fund, and an accounting firm that prepares the annual statements for the fund cannot audit the fund. The cost of audits these days range from $350 up to in excess of $600, depending on the complexity of the fund.

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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