Ask Max: Your questions answered

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:

• What are the withdrawal rules on home saver accounts?
• What are the differences between ordinary and reversionary pensions?
• Can shares be transferred out of our fund?
• Should we sell an investment property to pay down our mortgage?
• What are the benefits of having a company trustee?
• Do we need life insurance in our fund?
• Can we transfer a marina berth from our fund?

What are the withdrawal rules on home saver accounts?

My daughter is saving for an apartment to live in and has saved $13,000 into a home saver account, which is one year old. She recently made some enquiries regarding a loan and was told the account could not be used for another three years.

I have looked on the net and believe this is not quite correct. From what I can see she can use the account by purchasing a property and transferring the account balance to her mortgage. I think she needs to give 30 days’ notice to the bank.

Her problem is that she was intending to use these funds as part of her deposit. My question is, can the balance of a home savers account be used as a deposit on a property? She is hoping to purchase a property valued at about $300k.

Home saver accounts can only be closed if certain conditions have been met. These include:

• at least $1000 per year has been contributed to the account in at least four financial years;

• the balance of the account has reached the limit set, which for the 2012 year was $85,000, and the account has been held for at least four years;
• you are building or purchasing a home and you hold the home saver account with someone else who is eligible to access the funds, and;
• where a person has turned 60 years of age.

Unfortunately as your daughter’s account has only been open for one year she must contribute at least $1000 a year for the next three years before gaining access to it.

What are the differences between ordinary and reversionary pensions?

What is the difference between an ordinary pension and a reversionary pension?

When a super fund member receives an ordinary account-based pension it ceases when they die. When the pension is a reversionary pension, in other words a person is named as receiving the pension once the super member dies, the pension reverts to that person and continues to be paid.

Can shares be transferred out of our fund?

My wife and I are retired and have a SMSF in pension phase. One of the assets in the fund could be better suited to one of our personal portfolios. Is it still permitted to transfer shares (off-market) from a fund to a member as part of their pension?

Pension payments could never be paid as in specie payments. The only way you could transfer the shares would be as a lump sum payment from an account in accumulation phase. The ban on transferring shares in specie into an SMSF has been postponed until at least July 1, 2013.

Should we sell an investment property to pay down our mortgage?

We both own our principal residence with a mortgage of approximately $300,000 and my wife has a rental property. It has been suggested she sell me the property after we receive several evaluations on its market value. She would of course have to pay the capital gains tax and would then use the remainder to pay off a large portion of our principal residence.

I would purchase the property, continue to rent it and pay the mortgage on an interest-only basis. The home has been valued at approximately $400,000 and is currently rented at $440 per week. Is this a reasonable method of reducing both taxable income as well as reducing our current mortgage?

What you are proposing will result in a major reduction in your non-deductible home loan and replace it with the deductible loan for the rental property. You may be eligible for relief from paying stamp duty depending on where you live. There will be tax payable by your wife that will need to be taken into account.

Before transferring the property you should seek advice from an accountant who will be able to calculate how much capital gains tax will be payable, and whether there are any steps she can take to reduce this. You should also seek advice from a real estate specialist to ensure buying your wife’s property is a good idea. Depending on the area it is in, and the condition of it, it may be better if you buy a different property with better capital appreciation potential.   

What are the benefits of having a company trustee?

My husband and I are trustees of our SMSF, which is in pension phase. In the event of either of our deaths our plan is to have our son step into the role as trustee. Our son will eventually be the sole beneficiary once we have both died, through a testamentary trust as per our wills.

Whilst our son neither contributes to or has any other interest in our SMSF and lives a considerable distance from us, we have considered setting up a company as trustee with ourselves as directors so that there is no transition in the event of the death of either of us. If our son does take up the role of trustee, it would mean we would be required to ferry paperwork to him for any dealings done with respect of the SMSF.

What are the advantages and disadvantages of a company as trustee as against individual trustees?

The disadvantages of appointing a company to act as trustee will be the cost and the initial administration work involved. The cost of a company will be approximately $800, plus there will be a yearly lodgement fee of $42. The increased administration work relates to changing the name of the registered owners for the investments currently owned by your fund.

The main advantage of having a company will be your fund carrying on after one of you has died, with nothing needing to change. The increased administration work may in fact be less of a chore than the complications you will face if your son becomes a trustee and all documents and investment paper work has to be sent to him.

Do we need life insurance in our fund?

We are 62 and 63 and have both retired.  I actively run our multi-million dollar SMSF, which was set up 12 or so years ago. We cancelled our life and income protection insurances on retirement. We are fully covered by private health insurance. I note that SMSFs now have to consider insurance within the fund.  Should we therefore take out a life insurance policy?

Under the new regulations that apply from this year trustees of an SMSF only have to consider the need for insurance, but are not forced to take out insurance. There are three main reasons why a person needs life insurance.

The first is to pay off debt, the second is to produce a lump sum to produce income if the main income earner in a family dies, and the third is to produce a lump sum to pay for costs associated with the death such as funeral costs.

If none of the three reasons for having life insurance apply, your SMSF does not need to take it out. You will however need to prepare a document that states the trustees have considered the need for life insurance and that in their opinion it is not needed. This could form a part of the fund’s investment strategy.  

Can we transfer a marina berth from our fund?

My husband and I have a marina berth (leasehold) held in our super fund. We would now like to transfer the berth out of the fund to us for personal use. My husband is over 65 years but is still working.  Can we transfer the marina berth into his name as an in specie lump sum benefit? Will we have to pay transfer duty on this in Queensland?

If your SMSF trust deed allows in specie payments you will be able to transfer the berth to your husband. This will have to be done as a lump sum payment and cannot be done as a part of a pension. Prior to transferring the berth you will need to get it valued and capital gains tax may be payable by the fund on the transfer.

I know that in some circumstances an exemption exists in Queensland on property transferring from an SMSF to a member. You should contact a solicitor that specialises in this area of law and find out if you will qualify for the exemption and what is required.

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