PORTFOLIO POINT: SMSFs and death benefits, retirement savings accounts, paying CGT on a former residence and distributing trust payments to minimise tax.
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
- How can I structure my SMSF to minimise death duty?
- Can I add my deceased wife's super to my own?
- I want to claim a tax exemption on a property I'm planning to sell.
- How do I distribute surplus cash from a family trust?
SMSFs and death benefits
My wife and I have an SMSF with a value in excess of $1,000,000 in concessional contributions. We are both around the 55-year mark and don’t plan to access our super until we reach the tax-free period of 60 years of age. We also have a non-super joint cash account of about $1,000,000, the mortgage is paid off and we both work at this stage.
If one of us should die, would the tax man apply a death duty tax on the 50 per cent amount that would be bequeathed to the surviving member of the fund? Also, as part of the total balance, about 40 per cent is in property – would it have to be sold and be subject to capital gains tax? Finally, is there a strategy within the tax structures that can be applied to avoid, or at least minimise, obligations to the tax man?
When a member of a superannuation fund dies, the trustees of the fund have several options. The first is to pay out the death benefit as a lump sum, which may require the property to be sold in order to fund the payment, and CGT would be payable.
The second option is to pay the death benefit as a pension. A death benefit pension can only be paid by a superannuation fund if the member is a dependent for income tax and superannuation purposes. In this situation, assets of the super fund would not need to be sold and therefore CGT would be avoided.
Before paying the death benefit as a pension, the trust deed for your superannuation fund would need to be checked to ensure that a death benefit pension can be paid. If your current deed does not allow this, you would simply have your deed amended and updated.
With regard to strategies that can be applied to your situation, you should seek advice from a professional who specialises in tax strategies, so that you can minimise income tax. One of these strategies would be to maximise your tax-free benefits in superannuation before you turn 65.
My wife and I both saved very conservatively for our retirement through investment in separate Commonwealth Bank retirement savings accounts (RSAs). My wife, aged 67, had a total of approximately $600,000 and was no longer making contributions, but had not yet taken any pension. I, three years younger, have a lesser amount of $400,000, as I am still working and able to make further contributions. My wife died last year and the estate is in the hands of an administrator. Although there is no will, I believe that I shall be the sole beneficiary.
My question is: am I able to benefit from the superannuation status of my wife's RSA? To put it another way, can I – in effect – add my deceased spouse's superannuation to my own? After all, the funds were set aside by both of us for our joint retirement. If so, what action do I need to take?
If the funds have already been paid to the estate, they will already be outside the superannuation environment. If this is the case, depending on whether you turn 65 after June 30 this year, you could make a non-concessional contribution of $150,000 before June 30 2012 and $450,000 after July 1.
If the funds are still in the RSA, what you can and can't do will depend on the rules and regulation of that RSA. You would need to contact the Commonwealth Bank and request that the death benefit be paid as a pension. By doing this, your wife’s superannuation will stay in the superannuation environment. It will hopefully help that you also have an RSA with the CBA.
CGT on property
I have a property which I bought in late 1986, and lived in with my parents until I moved out after getting married in 1990. My retired parents continue to live in that property. They don't pay any rent and don't receive rent assistance from the government. I don't claim any deductions for the property, so am I required to pay CGT when I sell the property? If so, is there any way to ask for an exemption, since this property was never rented out (no income) or deductions claimed?
If the property was your residence while you lived with your parents, a portion of the capital gain will be tax free under the main residence capital gains tax exemption. The only other way to decrease the assessable capital gain on the sale of the property will be to total up all of your holding costs. These costs would include interest on loans, rates and taxes, repairs and any improvements or additions made.
The total of all the holding costs would be added to the original purchase price, to arrive at the cost that will be deducted from its net selling value. You would then calculate the percentage of time that the property was your main residence. This percentage of the gain would be exempt from capital gains. Of the gain remaining, 50 per cent would be an assessable capital gain and have to be included on your tax return.
My wife and I are secretary and director, respectively, of our trustee company and we and our three adult children are beneficiaries of the discretionary family trust. If the trust has surplus cash from the sale of a property and we distribute some equally to the three children – either through a cash payment or by way of paying off some of their house mortgages – is the whole of that payment taxable income to each of them in the year it happens? They all have varying taxable incomes, so is there a minimum amount we could distribute without them incurring tax?
The tax treatment of trust income is totally separate to how payments from a trust are treated. There would be nothing stopping you from distributing the taxable profits related to the sale of the property to you and your wife. This trust distribution will be shown on your individual tax returns and tax would be payable by you. You could then make payments from the trust to your children on your behalf without their income tax being affected.
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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