Ask Max: Your questions answered

Conditions of release, taxes payable on death, reversionary pensions, and stamp duties on in-specie transfers.

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:

  • If we resign from our trust, do we meet a condition of release?
  • What tax is applied to non-dependent beneficiaries on death?
  • What is the tax treatment on gains or losses from fixed-interest securities?
  • Can a surviving fund member receive the pension of a deceased member?
  • Do we pay stamp duty on in-specie transfers of property or shares?
  • What taxes would be payable from our SMSF on our deaths?

If we resign from our trust, do we meet a condition of release?

We are directors of our family trust along with our son and we both work part-time for the trust. The work we do is of a physical nature. We are not paid for our roles as directors. Do we meet the condition of release if we resign from our physical work and cease our wages? Are we able to continue to be directors? Does this meet a condition of release? How much work, if any, can we continue to do?

If you are under 60 your intention must be to retire, so finishing employment with the trust would not be enough. The definition of retirement is intending to work less than 10 hours a week. After resigning you could continue as directors of the trustee company for your family trust as long as you did not exceed the nine hours a week test.

If you are over 59 but less than 65, resigning from being employed by your trust will mean you have met a condition of release. You could resign from being employed full-time and come back as a part-time or casual employee. If you are 65 or older, you have complete access to your super.

What tax is applied to non-dependent beneficiaries on death?

I am seeking clarification to the current tax applied to death benefits paid to non-dependent beneficiaries on death. I read some time ago about a draft tax ruling that outlined that a superannuation pension ends when the pension member dies unless a beneficiary is entitled to a reversionary pension. It stated that a fund’s assets are no longer exempt from tax when the pension ceases and that CGT is payable on any capital gains from the sale of assets to pay lump sums to beneficiaries. Is this the case?

If a member dies, and their superannuation benefit must be paid to their beneficiaries, capital gains tax will be payable on the sale of the investments after they have died.

What is the tax treatment on gains or losses from fixed-interest securities?

Would you please clarify for me the tax treatment of determining whether a gain or loss on sale of a fixed-interest security is treated as a capital or revenue gain or loss? I purchased some NABHA floating-rate perpetual notes for an average cost of $97 some years ago. I sold some of my holding in the 2012 tax year for $77.65 each. Is the loss of $19.35 offset against capital gains or directly deductible against other assessable income?

The $19.35 loss you have made will be a capital loss not an income loss. If you have not made any capital gains in the year the capital loss was made it can be carried forward to offset against future capital gains.

Can a surviving fund member receive the pension of a deceased member?

My wife and I have an SMSF and both of us are member/trustees and we are both in account-based pension mode. In the event of one of us passing away I have a few questions.

1. Would it be a good idea to make one of our sons an extra trustee so as to ensure there are a minimum of two trustees always supervising the SMSF?

2. Can the surviving member continue receiving the pension of the deceased member?

3. Assuming the surviving member can continue to receive a pension from the deceased member’s superannuation, can the balance of the superannuation amount of the deceased member be rolled into the surviving member’s superannuation account or does it remain a separate account?

If you want to minimise the administrative work when one of you dies it is a good idea to either appoint one of your sons as a trustee or have a company to take over as trustee from you both now. Appointing a company may require a bit more administration now but it would remove the necessity for the son who becomes a trustee having to sign all future investment applications.

When one of you dies there are two ways in which the pension of the deceased can be paid to a surviving member. Under the first you make your current pensions reversionary so that upon the death of one of you the pension automatically passes to the other. The other option is for the trustees to decide to pay the death benefit as a pension.

You would be able at some point to combine the pensions into one account but this may not be advisable. If one of you has a higher percentage of tax-free benefits than the other you would want to preserve this pension while running down the other. You should seek professional advice before combining the pensions to make sure you are achieving the best result.

Do we pay stamp duty on in-specie transfers of property or shares?

My husband and I have a SMSF, of which we are both trustees. We are aged 62 and 61. We are the only beneficiaries of the fund. This fund owns an investment house and some shares. We are considering moving the house out of the fund and into our own private ownership, possibly as an in-specie transfer, or purchasing it from the fund in our own names. We live in Queensland.

Please advise whether we would have to pay stamp duty on this transaction, in each of these possible circumstances? We are currently drawing a transition to retirement pension. Would we need to meet a condition of release, that is, retire to take the house in-specie? Are in-specie transfers still available?

If you are currently receiving a transition to retirement pension that would indicate you are both still working. In this case to be able to transfer the property into your personal hands you would need to meet a condition of release.

In-specie transfers are allowed from a super fund to a member, the change to the regulations being proposed relates to investments being transferred into a super fund. There are some circumstances where stamp duty is not payable on a property transferring from a super fund to individuals in Queensland. You should seek advice from a solicitor that specialises in this area before taking any action.

What taxes would be payable from our SMSF on our deaths?

We have an SMSF with three members, being my husband, adult son, and me. My husband and I have reversionary pensions payable to each other on death, and on both our deaths the proceeds of the fund go to our son. So I don’t believe there are any major tax issues for us but assume that any death benefit payable to our son would be subject to CGT on any profits and then part could also be subject to lump sum tax of 15%. Could you please clarify?

Unless your son is a dependent under both the SIS and income tax regulations the benefits remaining after you have both died must be paid to him by the fund. When the first of you dies no capital gains tax will be payable as long as the member’s benefit is paid as a reversionary pension or a death pension benefit. Once you have both died the investments related to the pension would need to be sold to pay out your son’s entitlements and capital gains tax would be payable then.

In addition to capital gains tax being payable your son, if he is a non-dependent, would also pay 16.5% tax on the taxable portion of your super benefits. There are a number of strategies that can be used to reduce the impact of capital gain tax when you have both died. You should seek professional advice as soon as possible to review your options.

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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