Ask Max: Your questions answered

Super splitting. Death insurance and minimising tax. The lowdown on reversionary pensions.

PORTFOLIO POINT: Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. Each week he draws upon this experience to answer the questions of Eureka Report subscribers.

This week:

  • Super splitting: things to consider.
  • Limiting SMSF administration.
  • Should I buy death insurance to minimise my tax bill?
  • Reversionary pensions.
  • Cash gifts to non-dependent children.

Super splitting

I am 54 years old and my wife is 49. I currently maximise my contributions through salary sacrifice and employer contribution to a compulsory industry fund. My wife contributes after tax to her industry fund to gain the co-contribution. Currently, I am the contributing member within our SMSF, and my wife is a non-member trustee. I intend working until I am at least 60, and will then look at taking a transition to retirement pension.

Up to this point in time, I have been doing a partial rollover from the industry funds into our SMSF on a yearly basis. The SMSF balance is approximately $450,000. If the current proposed change occurs regarding maintaining the $50,000 contribution cap (where balances are under $500,000), I need to start splitting contributions with my wife.

From reading various fact sheets and the ATO’s 'Superannuation contribution splitting application', I have a few questions:

1. If my wife becomes a contributing member of our SMSF now, can I split last year’s partial rollover contribution with her (85%)?

2. Assuming that I can do the above, how do I prove that partial rollover amounts are made up of employer and salary sacrifice contributions?

When super splitting was introduced, a number of conditions had to be satisfied to allow up to 85% of a member’s contributions to be split with their spouse. The main requirement was that the spouse had to be under 65 years of age and not retired.

Where a member qualifies for superannuation splitting, a notice requesting the split must be provided to the super fund in the financial year immediately after the financial year in which the contributions were made. Super splitting is not compulsory and some superannuation funds do not allow it.

Super splitting can only apply to a rollover when the whole of a member’s balance is rolled out of a super fund. This means you could not have super splitting apply to the amount rolled into your SMSF. You should check with your industry fund to see if they allow super splitting, and if so, could then request them to do so.

Your wife’s balance could then be rolled over to your SMSF. When the rollover occurs, the paying super fund details what the rollover is made up of. This means the only paperwork you need is the rollover form supplied by the industry fund.

SMSF accounting costs

My wife and I manage Australian and international share portfolios for our SMSF and we have almost identical portfolios outside our SMSF also. We have automated our processes as much as possible, but still find the end-of-year administration and accounting onerous, even though we pay an accountant to look after the accounts and tax.

Is there any way we can mingle the non-super and SMSF portfolios, for example by creating a unit trust that owns all the shares? We, as investors, and our SMSF would separately own units in the trust. This should simplify the accounting for our SMSF, which would simply hold units in the unit trust and halve the effort we go through to provide the accountant with accurate share transaction and dividend records.

You could set up a unit trust that you as individuals and the SMSF could have units in, but this would result in all shares being sold. This could mean, depending on how long ago the shares were purchased, that you end up with a large personal capital gains tax bill.

Another option would be to see if your accountant has access to one of the modern internet-based accounting packages. One that our firm uses receives all of its information electronically from banks and companies. This means the amount of administration work is cut down dramatically. In addition, clients have access to the information that is shown at market value.

Death insurance

I have an SMSF paying minimum pensions to myself and my wife. The fund and the pension payments are all tax-free. In the case of death, a pension is rolled over to the survivor. The problem is that on the death of both of us, any balance in the fund goes to non-dependent children and is subject to tax accordingly.

The main risk is if we die together, there will be no opportunity to pull the balance out of the fund before we die. To minimise the risk, I am contemplating accidental death insurance to cover the anticipated tax. There is no need to insure us both, and my idea is to insure my wife (younger and cheaper). In the event she predeceases me, I could then take out cover on my life, or wind up the fund and distribute the balance to me as a pensioner, tax-free. Do you see any problems with such a strategy?

Depending on your ages, the cost could be prohibitive. It becomes a personal choice if you want to run down your assets to cover the insurance premiums. You could instead, depending on your ages, increase the tax-free component of your superannuation through a re-contributions strategy.

If you are both over 60, but under 65, you could take lump sum payments of up to $600,000 each. You would then make a non-concessional contribution each of $150,000 before June 30 in one financial year and then $450,000 in the next.

Another alternative is to assess how much super is needed to fund your ongoing pension when one of you dies. If an excess is identified, this could be withdrawn and invested in a tax-advantaged insurance bond that would pass to your children upon death. Before embarking on any of these strategies, you should seek professional advice.

Reversionary pensions

My wife and I are the sole members and trustees of our SMSF, and we are both retired and receiving account-based pensions. When one member dies, we want the ABP to continue as a reversionary pension to the surviving member. This has been detailed in a fund minute signed by both members.

Is this action sufficient to ensure continuation of the ABP, thus avoiding the deceased member's pension account becoming an accumulation account with the attendant tax penalties?

The first thing you should consider doing is ensuring your super fund’s deed allows for reversionary pensions – and if it does, check what documentation it stipulates must be prepared. It would also help if the original application for the pension by each of you stated that you wanted the ABP to be reversionary.

You don’t actually need an ABP to be reversionary to avoid the tax problem when one member dies. Death benefits can be paid to a dependent as a pension. In this case, the new pension would start immediately after death and no capital gains tax is payable, as no investments had to be sold.

Cash gifts

What value of cash can you gift to a non-dependent child without it attracting tax consequences?

Australia has not had gift duty for many years, so giving money to a non-dependent child does not result in any tax payable by you. If you are receiving Centrelink benefits, the gifting provisions would apply and the amount gifted could be classed as an asset for up to five years. Also, if the money is invested on behalf of the child, they will pay tax at a punitive rate on income earned over $416.