Ask Max: Your questions answered

This week's questions cover super contributions (ahead of June 30), plus how to minimise capital gains tax when moving house.

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:

  • Contribution limits.
  • Inheriting a super fund.
  • How should I share the proceeds of my property sale?
  • Changing to a company trustee.
  • Pensions and indexing
  • Buying a new home, and renting out the old.

Super contributions

Could you please let me know what the allowable level of contribution is in this financial year ending June 30 2012? Is it $25,000 or is it still $50,000? Also, what is the level of contribution for the 2013 financial year?

For the 2012 financial year, the concessional contribution limit is $25,000 if you are under 50 and $50,000 if you are 50 or over. For the 2013 year, the same limits apply, except if you are 50 or over and you have more than $500,000 in superannuation. In this situation, the limit will be $25,000.

Paying out an SMSF

I will turn 65 in December 2012. I am retired and have a pension fund, as well as an accumulation fund to which I contribute every year. My son is a director of my SMSF trustee company. He is also a member of the fund without any assets in his name. He is my sole beneficiary.

On my death, I had understood that if he wished the share portfolio to remain within the fund, it could be transferred to him as long as he paid an additional 15% tax on all salary sacrifice contributions made by myself and my late husband, which were used to purchase the shares. Is this the case? If not, what is the advantage of having the trustee company if the balance has to be paid out? If the balance does have to be paid out, how much tax will my son have to pay?

Unfortunately, when you die your superannuation must be paid out, as your son is not classed as a dependent. You would have had a benefit of having a company act as trustee when your husband died, as your fund would have continued without any action having to be taken. When your super is paid to your son, tax will be payable by him at 16.5%.

Property sale

I recently sold some real estate held in my name and I understand the proceeds can be shared with my wife, and that she can then contribute to a super fund. I am 68; she will be 65 in October and is not working. My understanding is that she will be able to contribute up to $150,000 this financial year and up to $450,000 next financial year, before her birthday. Is this correct?

What you do with the proceeds will be up to you; unfortunately, as the property is in your name, any capital gain will have to be shown on your tax return. If you met the work test this year, and if your employment income is less than 10% of your total income, you could make a tax deductible, self-employed super contribution. Your wife will be able to contribute the $150,000 this financial year and $450,000 next financial year before she turns 65.

Company trustees

My SMSF has been set up for many years now, but recently I was made aware of something that might be cause for alarm. I have set my SMSF up as a "partnership", with two trustees (namely myself and my wife). I was told that if one of us dies, the super fund becomes non-compliant and things can get complicated from this point forward.

At this time in one’s life, one does not want to have to cope with problems with the super fund on top of having to cope with the loss of a loved one. I was told that it is a better option to have the super fund set up with a company as trustee, and it is a simple matter to appoint a new director, should one serving director die. It isn’t a pleasant thought, but sometimes these things are better sorted out well beforehand. Have you heard anything about the above?

What you have heard is partially correct. Having a company take over as trustee would mean that when one of you dies, there will be nothing that needs to be done; you will not even need to appoint another director. Changing to a company trustee now does, however, create an administration burden, because you would need to change the name your SMSF’s investments are held in over to that of the trustee company.

Indexed pensions

Currently my retired husband, who is 62, has an indexed superannuation pension of $1700 per month and this is for life. When he turns 65, would he be eligible for the aged pension or would this indexed pension be classed as income? He also has a flexi pension of $2250, which will run out by the time he turns 65.

The indexed lifetime pension could affect the amount of age pension your husband would be eligible for under both the income and the assets tests. There is a complicated formula used to calculate the value of a lifetime pension counted as an asset by Centrelink under the assets test.

In addition, the value of the pension he receives will be counted as income. Depending upon the type of pension, it could be decreased by its purchase price to arrive at a net amount counted by Centrelink. This is calculated by dividing the value of the pension at the time he started receiving it by his life expectancy at that time. You should seek professional advice to assess how much (if any) of the age pension you will be eligible for.

Buying and renting a home

We own our existing home outright. We have just purchased a larger home and plan to make our existing home a rental. However, we want to do some renovations before moving into the new house. I have read we have six months to move in to make it our primary place of residence before capital gains applies. Is this correct?

Should we get a valuation of our first home before we move, so we can easily calculate the capital gains thereafter? If so, how many valuations should we get? I assume we want as high a valuation as we can get?

You are right about the main residence exemption applying to two properties for up to six months. This is the case when you purchase a new property and the original property was used as the main residence for a continuous period of three months over the previous 12 months of ownership. You are also not allowed to have rented or produced income from the property during those 12 months.

Once you move into your new home and commence renting your old home, capital gains tax will be payable on it from that point. The valuation method will not apply, as the property was your residence first and then rented out. For properties purchased after September 21 1999, which are first used to produce income and then become a residence, the valuation method must be used.

In your case, if you rent out your home and then sell it, you will need to use the 'days of ownership’ method. The exempt capital gain will be the days you lived in the property as a percentage of the total days of ownership. If you are borrowing to purchase the new home, you should get advice as to whether it will be better to sell your current home, resulting in less of a non-deductible loan on your new home, and then possibly purchase a new rental property that will be 100% geared.

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.

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