Ask Max: Your questions answered

PORTFOLIO POINT: Portfolio allocations, super contributions, SMSFs and financial advice for an intending couple.

Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. It’s that experience working with private investors that has led to the Ask Max column, to provide expert advice to Eureka Report subscribers. – James Kirby, managing editor

This week:

• Should I change my portfolio allocation?
• What goes into the $25k limit?
• How does Centrelink count assets?
• How do we set up a TTR pension?
• Asset sales and CGT.
• Preparing financially for marriage.

Portfolio allocations

I have my super with First State, with an asset allocation of 35% Australian fixed interest, 40% international fixed interest and 25% in cash. I have been out of equities since mid-July 2011. With all of the goings on in Europe, should I move it all into cash? I really don't understand how exposed I am having funds in the two fixed interest areas. I would really appreciate your advice.

Given the European debt crisis I think the amount you have allocated to international fixed interest is taking a big risk. I am not sure what investment choices you have with your super fund but I believe you would have less risk and a better income return by allocating some of your super to direct property.

Caution must be exercised when investing in the property choices offered by many super funds. In some cases, they can be investments in listed property trusts rather than direct property. At this time in the investment cycle some listed property trusts are showing good returns, but I regard them more as a share investment rather than a property investment.

This is because their income is often not just made up of rent but can include property development income or income from investing in other property trusts. In addition, their value is not dictated to by the value of the property but by sharemarket sentiment.

The $25k limit

Can you clarify the super contributions that make up the $25,000 limit? Is it the company’s 9% super contribution, your 5% super (salary sacrificed) and any further amount you may wish to contribute (salary sacrificed) or is it just the latter two of above.

The super contributions included in the $25,000 concessional contribution limit are all contributions made before tax. This includes compulsory employer super contributions, regular salary sacrifice super contributions, and lump sum salary sacrifice contributions.

Centrelink and assets

When it comes to counting assets by Centrelink, for a person that might need to go into low or high care, is there a difference between the assets in a SMSF with husband and wife as individual trustees versus the assets in SMSF with a company trustee.

Under the Centrelink assets test, the value of superannuation counted is the balance of the pensioner’s super account. It does not matter whether there are individual trustees or a company trustee. The only time a super balance will not be counted is if a member is below age pension age and they are not receiving an account based pension from the super fund.

TTR pension

My wife and I are 61 years old and just set up our SMSF. How do we get it into TTR pension phase in order to reap the benefits of the zero tax environment?

The first thing to check is whether the trust deed for your super fund allows a TTR pension to be paid. If it doesn’t, you will need to have your deed updated. If it does, or once the deed allows it, you need to write letters as members to yourselves as trustees requesting the TTR pension be paid to you.

You then should draw up a trustee’s minute or resolution that confirms the TTR pension will be paid. You should state in the wording that because you are both over 60, and therefore the pensions received will not be taxable, the super fund will not need to register for PAYG Withholding tax.

If the fund will be receiving further contributions you will either need to segregate the investments between the accumulation accounts and the pension accounts, or obtain an actuaries certificate each year.

Asset sales

We have an SMSF that has two members in pension mode and two in accumulation mode. In order to pay pensions, assets have to be sold, which will have a capital profit. Is this capital gain free of CGT as the proceeds are immediately channelled to pay the pension or must the capital profit be apportioned between the pension funds and accumulation funds with the accumulation fund portion paying CGT at normal super rates?

How much capital gains tax will be paid will depend on whether you have segregated the assets between the accumulation and pension accounts. If you have, and the assets sold were allocated to the pension accounts, no capital gains tax will be payable. If you haven’t segregated the investments a portion of the capital gain will be taxable. The assessable amount will be calculated by the actuary for your fund.

Preparing for marriage

I recently proposed to my girlfriend and we are going to be married in March 2013. So with all that time is there anything I should be doing now to make the most of any benefits after we get married, if there are any? I earn $200,000, have two investment properties with loans on them and $70,000 in shares that are currently worth $100,000. She earns $60,000 and has $6000 of shares currently worth $9000. We live together and rent a place in the CBD.

There are no tax benefits, other than the dependant spouse rebate or family tax benefits, which will become available to you once you are married. Unless your girlfriend plans to stop working as soon as you are married, or you will be starting a family immediately, you won’t be eligible for the rebate or benefits.

If you are earning large amounts of interest you could consider transferring the funds into an account in your girlfriend/wife’s name. This would result in tax being paid on the interest at 30% rather than the 45% rate that applies to you.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.

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