Ask Max: Your questions answered

Pension processes, SMSF employment, personal contributions, unlisted property trusts and mortgage funds, and portfolio valuations.

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:

  • Do I need to have a formal pension process?
  • Can my SMSF employ my building company?
  • Can I make personal deductible contributions into my super fund?
  • Should I roll over my super to reduce fees?
  • What is your view on unlisted property trusts and mortgage funds?
  • Do I need to advise of changes in my share portfolio’s value?

Do I need to have a formal pension process?

I am 56 and my intention is to build up a portfolio of dividend paying stocks to transfer into an SMSF, before I turn 60, so that I can take advantage of the franking credits once the fund is in the pension phase when I turn 60. But it is the ‘pension phase’ I don’t quite understand. If I receive CBA dividends each April and October, and WBC, ANZ and NAB dividends in July and December and use those to live on, does that constitute a ‘pension phase’ or does it have to be more formalised?

A more formal process needs to be followed. To start a pension a letter should be written by the member to the trustees requesting a pension. The trustees would then prepare a resolution stating that the pension is to be paid and send a letter to the member confirming the commencement of the pension.

This sort of administration work is normally looked after by the service provider for your SMSF. In addition to the documentation in some cases the fund must also register for PAYG withholding tax and engage the services of an actuary.

Can my SMSF employ my building company?

I am a retired person (over 60) with both an employer provided super fund, and also a recently established SMSF into which my wife and I will shortly transfer $900,000 under the three-year bring forward rules. Our SMSF accounts are presently in the accumulation phase.

It happens that I also have a builder’s licence and an associated company, and over the years I have gained experience in purchasing property, redeveloping it and then selling it for profit. Consequently I would like to explore the options for my SMSF investing in similar activity.

I envisage my SMSF acquiring a suitable property and then paying my building company, on a demonstrably proper basis, such costs plus a fair margin to undertake renovation/rebuilding.  The improved property could be retained for rental income purposes, or sold for profit. 

My questions are:

1) How do I ensure it is acceptable for my SMSF to hire my own building company and what would be necessary to demonstrate no breach of the ‘sole-purpose’ test or other relevant tests?

2) What provisions are necessary to ensure investment income from this activity, be they rent or capital gain, enjoys the low tax regime of super including zero tax in pension phase?

3) At what point in time would the SMSF need to establish a pension account in order to enjoy zero tax on sale or rental proceeds?

4) Are there any impediments to executing a number of projects in sequence, as opposed to a one-off?

The answers to your questions are:

1. To make sure your SMSF can undertake these investments you should speak to the auditor of your fund. From what you have described, as long as you can provide evidence that the contract entered into between your SMSF and building company is on commercial arms terms, and the proposed investment is a part of the investment policy of the fund, there should not be a problem with what you are proposing. The only time trustees can be paid for work by their SMSF is when it is not associated with the administration of the fund and they are suitably qualified to perform the work.

2. As long as the investment can be undertaken by your fund there is nothing, other than making sure everything is documented properly, that you need to do.

3. The fund would need to first commence paying pensions to members, and if there are members with accumulation accounts, segregate the investments of the fund and allocate the property investment to the pension accounts.

4. If the fund did a series of these investments, such as buying and selling the properties in quick succession, it could be at risk of being regarded as running a business. Although there is no specific ban on an SMSF running a business it can cause problems for a fund.

There is an old High Court case where a builder stopped running his business through a company, then did the same sort of projects through his super fund. This was held to be in breach of the sole purpose test and penalties were applied.

If instead the fund bought properties, improved them, held them for a time to produce rental income, and then sold them, there would be less chance of it being regarded as running a business.

Can I make personal deductible contributions into my super fund?

I am about to sell my investment property and am sure that I need to pay capital gains tax. Please advise if there is any option to reduce the CGT? I also have a self-managed super fund. Can I make personal deductible contributions into my super fund?

You will be able to make a tax deductible self-employed super contribution if you either receive no employer super contributions at all, or if your employment income is less than 10% of your total taxable income in the year you make the contribution.

Should I roll over my super to reduce fees?

I have a Macquarie wrap account and I am thinking of getting out of it. It’s through a financial planner attached to an accounting firm and I think that the fees are too high. They include a wrap admin fee plus a fee for ‘reviewing’ the arrangement twice yearly. I’d be interested in your opinion as I previously had about $72,000 in First State Super.

If you don’t think you are getting any benefit from the twice yearly review, and given the relatively modest amount you have in super, you should consider rolling over your super into an industry fund. To help you choose which fund will be best some industry funds provide access to a super fund comparison service. I know that Australian super offers this service as part of their website.  

What is your view on unlisted property trusts and mortgage funds?

Virtually all the investments in our SMSF are term deposits and we are considering alternatives for yield as the term deposits start to mature. We hate the volatility of the share market, so are looking at corporate debt, unlisted property trusts and mortgage funds. We are interested in your opinion on unlisted property trusts and mortgage funds given the problems experienced during the GFC. What is your view on the following: Charter Hall Direct Property Fund, Cromwell Ipswich City Heart Trust, and La Trobe Pooled Mortgage Fund?

After reading your question the first time I became worried that you had installed listening devises in my office and been intercepting my correspondence. The three investments you have mentioned are all included in the portfolios I recommend to my clients. They are very well rated by rating agencies and the managers have proven track records.

Do I need to advise of changes in my share portfolio’s value?

I would appreciate your advice regarding my account-based SMSF, which receives a part aged pension through Centrelink. Apart from this pension, the fund relies solely on dividends from a share portfolio, which fluctuates greatly in value, but has so far made a “paper” profit.

The dividend income stream received however is fairly static at the same amount, regardless of the value. Am I required to advise changes in share portfolio value, which really doesn’t benefit the fund at all unless sold, in view of the constant income stream and also because it doesn’t seem to be a true asset until realised? Declaring changes in value of course means that the pension would fluctuate, even though the fund income remains constant.

The decision as to whether you value your shares in the SMSF at market value has been taken out of your hands. As a result of changes made to the SIS regulations in August this year SMSFs are now required to value their investments each year at market value.


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