Ask Max: Your questions answered

Making super contributions under 'bring-forward' rules, plus what to consider when buying US property.

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:

  • Making super contributions under bring-forward rules.
  • Transition-to-retirement pensions.
  • If I close my SMSF, will I have to pay capital gains tax?
  • Getting the most out of contributions.
  • Paid-in-advance interest.
  • My daughter is moving overseas – what are the implications for our SMSF?
  • Buying property in the US.

Bring-forward rules

What are the consequences of depositing $400,000 into an SMSF as a non-concessional contribution, related to the bring-forward contribution rules, as opposed to three $150,000 packages?

By making the $400,000 contribution this year, you will trigger the bring-forward rules for non-concessional contributions. This will mean that for the 2012, 2013 and 2014 financial years, you will only be able to contribute a further $50,000 as a non-concessional contribution. The benefit of making the contribution now will be that income earned on the $400,000 is taxed at the super fund rate, rather than your personal tax rate.

TTR pensions

I have an SMSF with a 'transition to retirement’ pension. With the impending minimum pension payment increasing to 4%, and a reduced $25,000 maximum concessional contribution next financial year, my personal taxable income will increase substantially. Will it still be a no-brainer for most over 55s with an SMSF to receive a TTR pension?

With the increase in marginal tax rates for the two lowest tax brackets from July 1 2012, there is still definitely a benefit from receiving a TTR pension. For every $1000 salary-sacrificed as an extra super contribution, the benefits are as follows:

-Tax rate (%) Benefit ($)
20.5
55
34
190
38.5
235
46.5
315

The tax rate and benefit amount shown includes the 1.5% Medicare levy. In addition to the increased amount contributed to superannuation, there is also the benefit of the tax saving received by the superannuation fund. For every $1000 of investment income in the super fund, there is a saving of $150, and for every $1000 of capital gain, there is a $100 saving.

Capital gains

I am the trustee/founder and only member of my SMSF. I reach 60 years of age in July 2012 and wish to retire. I haven't worked for five years and I have about $100,000 in capital gains. Is there a strategy I could use to minimise or be exempt from the CGT liability?

I understand that if I draw an account-based pension (when I turn 60), both earnings and CGT wouldn't be incurred in the SMSF, but what if I wish to close down the SMSF and transfer the assets into my name? Will the SMSF be liable for CGT in this case? If a pension is drawn for the first year, can a lump sum for the entire account balance be withdrawn and the SMSF closed?

If you closed down the super fund now, capital gains tax would be payable by your SMSF. As you are retired, you could commence an account-based pension now from your super fund, but tax will be payable on the pension. This tax would be reduced by the superannuation pension tax offset of 15%. If you waited until you turn 60, the pension would be tax-free and no tax would be payable by your super fund on the $100,000 capital gain.

There would be nothing to stop you from withdrawing your entire super as a lump sum after the pension was paid and the SMSF investments sold, while still in pension phase. What I don’t understand is why you would want to do this. You should seek professional advice before embarking on this strategy.

Maximising contributions

I will turn 65 in the next financial year, but in any case can probably meet the work test for the next few years. My husband is 71 and is not working. We have an SMSF with member balances of $570,000 and $361,000 respectively, in pension phase, with both pensions reversionary. The difference in balances is because I have been able to contribute the proceeds from an asset sale, while he has not been eligible to contribute.

We have recently received a further $350,000. As I contributed $50,000 at the beginning of this financial year, I thought I would contribute another $100,000 before June 30. I am then undecided on the best strategy for the remaining $250,000: I am thinking that we could leave it outside of super, and still pay no tax on its earnings; or should I contribute again next financial year?

As a general principle, it is better to have money inside super rather than outside. That being the case, it would be best if you contributed $100,000 before the end of this financial year. Next financial year, you would then contribute $250,000. If you did this, you could contribute a further $200,000 up until June 30 2014, as long as you continue to meet the work test.

'Paid in advance’ interest

I have read that the ATO limits the amount of 'paid in advance’ interest that can be claimed up-front. Can you clarify please whether that statement is also true for other investments, such as margin lending, where interest can be paid in advance?

The prepayment rules relating to interest also relate to other expenses. When you earn non-business income – in other words, investment income – you can prepay an expense (including interest) for up to 12 months. This rule applies to loans for a property or a margin-lending loan.

Moving overseas

I have an SMSF and my wife and eldest daughter (who is 26) are trustees. My daughter has married and moved overseas and will very likely be there for at least five years.

There were contributions this financial year, but my daughter is not intending to make further contributions to the fund (but can, if necessary). The bulk of the funds in the SMSF are my contributions and I actively contribute and manage it. What are the tax implications for her and the fund if she is now a non-resident, non-contributor?

As your daughter will not be an active member of your SMSF, because no contributions will be made on her behalf, your SMSF will pass the residency test. In other words, as you and your wife will be the only active members of the fund, and as the trustees are living in Australia, the residency test for central management of the fund will be satisfied.

Buying US property

My husband and I have an SMSF. We are considering purchasing a property in the USA and are having difficulty finding information on the tax treatment of income. If we decide to go ahead, we have the funds within our SMSF to purchase a property without finance and would do so through an LLC. We are considering property in Atlanta.

We realise we need to pay US state and federal taxes on any income from the property. Do these tax payments count as an expense for our Australian tax return? Would we only pay Australian tax on net returns after expenses and US taxes? Also, do you know what the rate of US federal tax is that would apply to income in the USA for our SMSF? If US taxes are at a higher rate than super fund tax rates in Australia, are there any tax credits available?

The income you earn in your SMSF from the US property will be regarded as foreign income. From this will be deducted all expenses related to the earning of that income. These expenses will not include any US taxes, either state or federal, but could include local property taxes.

The super fund will receive a credit for any US state and federal income taxes paid. As the fund will only be paying tax at 15%, this could mean no further taxes are paid by your SMSF on this US rental income. The US taxes will not result in a tax refund for the SMSF. I am unaware of what the US federal tax rate is. You will need a local accountant in the US to help you with your tax obligations.

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