Ask Max: Your questions answered

Pension payments when a member dies, claiming interest on geared shares, unreasonable auditors and super splitting.

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 members.

This week:

  • Pension payments when a member dies.
  • Capital gains rates in income producing assets.
  • Can I claim interest on a geared shares portfolio?
  • Will my job put me over the contributions limit?
  • Is my fund auditor being unreasonable?
  • Clarifying the rules on super splitting.
  • Taking a lump sum in pension phase.

Pension payments when a member dies

Could you please advise what proportion of an annual pension needs to be paid during the year to keep that person’s entitlements tax free? If the surviving member dies prior to having received a pension for that year, would all income normally allocated to that person be taxable in the name of the fund? Is it possible to minute an instruction to the fund to ensure pensions are paid until time of death or by the end of the financial year? Would an unpresented cheque ensure that the pension payments have been made as long as the cheque is cashed prior to the end of the financial year?

For the 2013 financial year a 25% discount applies to the minimum pension payment limits. This means for someone 55 to 64 the minimum pension rate is 3%, and for someone 65 to 74 it is 3.75%. To avoid problems with an annual pension not being paid before a member dies it makes sense to pay the pension monthly.

If a member in pension phase dies before having taken any pension payments the fund cannot be regarded as being in pension phase and the income of the fund will be taxable. None of the actions you have suggested would get around this problem. Unfortunately when a member dies the pension ceases and anything that happens after that date occurs in accumulation phase unless it was a reversionary pension.

Capital gains rates in income producing assets

I viewed your video on CGT. I believe that if you hold an income producing asset such as property or shares for more than 15 years then the CGT payable is only on 25% of the gain at your current marginal tax rate. Is this correct?

The discounts that results in tax only being paid on 25% of a capital gain relates to profits made on active assets sold by a small business. Active assets are those used by a business in the course of doing business such as factories, offices, shops and goodwill.

Can I claim interest on a geared shares portfolio?

I borrowed $30,000 to buy some shares. These shares aren’t yet producing a dividend and I’m holding them until their share price goes up to a sell price I’ve calculated.  Can I claim the interest on the loan off my tax?

If the shares will never pay dividends, and are only held to make a capital gain, the interest could only be claimed as a holding cost of the shares and reduce the capital gain.

Will my job put me over the contributions limit?

I’m 32 and got a new job this financial year, which by my calculations will mean I’m putting in over $25,000 into super from the mandatory 9% super contributions.  Does this mean I’ll be taxed for any mandatory contributions above the $25,000 limit? If so, do you have any advice on how to avoid the tax I’ll pay by going over the limit?

I don’t understand how you would exceed the $25,000 limit from compulsory contributions from one employer. Under the SGC rules the 9% is only payable on salaries up to $183,000. On this basis the maximum compulsory contribution should not exceed $16,470. If you are exceeding the $25,000 it must be due to salary sacrifice contributions, which should not exceed $8,430.

Is my fund auditor being unreasonable?

I am retired and drawing a pension from my SMSF. My accountant set up my SMSF and does the tax returns annually for me. He uses an independent auditor who checks the fund out for compliance. I have spent a lot of time studying equity trading and have been using a stop loss strategy to minimise losses, which leads to a large number of trades over the year.

Last year the auditor told me that if I continue to trade such large numbers of shares, he would report me as a non-compliant SMSF. I claim I am trying to manage risk and preserve the fund. He is particularly upset when I sell a dividend share.

Do you think that he is being unreasonable? Do other trustees of SMSFs have the same problem using stop losses as me, or should I find another accountant and auditor?

If the investment strategy for your SMSF states that it is the policy of the trustees to limit downside risk by using a stop loss strategy, the auditor is certainly unreasonable to threaten you with non-compliance due to running a business. You should therefore look for a new accountant and auditor for your fund.

I do, however, question whether you are too slavishly following the stop loss strategy to the point you are missing out on franking credits because of not holding the shares for more than 45 days.

Clarifying the rules on super splitting

As far as I can tell, if I conduct super splitting with my wife, 85% of the actual dollar amounts of my contributions from the previous financial year are transferred across to her super account and seem to be invested into her account at whatever unit price is prevailing at the time I do the split.

This means that if my super has done badly during the previous financial year, and in fact if it has done badly overall up to the point where I decide to do the split (which can be any time up to the end of the following financial year), I can avoid incurring those losses in the amounts I contributed during that financial year by splitting them across to my wife’s account. Of course, vice versa applies. Is that correct?

No I don’t think you are correct. You can super split with your wife up to 85% of your concessional contributions in a financial year. This means the amount that can be split is expressed as a dollar amount rather than a unit price.

If the value of your super investments drops, resulting in a lower unit price, after the amount split with your wife your super could drop by more than what you transferred to her. This might not be a problem if you are 50 or older and want to maximise your contributions.

In the new rules relating to people with less than $500,000, which hopefully will apply from July 1, 2014, the combined effect of super splitting and the drop in value of your super investments will ensure you remain below the limit and be able to contribute up to $50,000.

Taking a lump sum in pension phase

I am retiring after my 60th birthday next month. As well as having a government indexed pension I have an SMSF with $1.5 million in shares and cash. I expect to take a 4% pension from the SMSF.

I want to sell my current unit for about $500,000 in Queensland and upgrade to a house in the same suburb for between $850,000-950,000. Am I correct in thinking that I can withdraw this amount from my SMSF after 60? If not what is the maximum amount I can withdraw including my pension? I have never taken a lump sum from my pension before.

Once you have retired and you are 60 or older there are no limits on what you can withdraw. There are limits, however, on what you can contribute. It sounds like you will need to withdraw up to $450,000 to fund the purchase. To ensure the withdrawal is done in pension phase you should consider taking the $450,000 as a lump sum extra pension payment.

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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