Ask Max: Your questions answered

Tax on recovered super, SMSF issues, and capital gains on an inherited house.

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 is the accounting treatment for recovered super capital?
  • Can retail funds be rolled over to an SMSF in pension phase?
  • Can we still operate a SMSF after leaving Australia?
  • Are there special reporting requirements for shares in a SMSF?
  • Is capital gains tax payable on shares of an inherited house?

What is the accounting treatment for recovered super capital?

My financial planner lost an excessive amount of money from my super fund and I took him to court. His insurers agreed at mediation to a payout. As a result I received a sum of $120,000 to reimburse my super fund for negligence. The losses occurred at the time of the GFC. The legal process was incredibly drawn out; however last year I received a payout.

I am now trying to work out how this capital reimbursement should be treated, in order to file my super fund tax return. To my mind it is not a contribution but a recovery of lost capital.

You are right about it not being a contribution. The accounting treatment of the $120,000 reimbursement will depend on how the original loss on the investment was treated. If the investment was effectively worthless and a capital loss has already been shown, the $120,000 received would be a capital gain for the 2012 year.

If the investment is still shown in the accounting records of your SMSF it would make sense, if the investment is not worth anything, to record a net loss for the investment after taking account of the $120,000 received. The accountant for your fund should be able to assist you with this.

Can retail funds be rolled over to an SMSF in pension phase?

I plan to start a SMSF with my wife. She has one fund (accumulation and pension); I have three funds: two paying pensions and one in accumulation. Is there an issue with transferring from retail funds into a SMSF when in pension phase?

There is an issue that has nothing to do with transferring from retail funds. For a rollover to happen from one fund to another the superannuation member must be in accumulation phase. This will mean you will both need to cease the pensions being taken and then roll over from the retail funds into your SMSF. If your current pensions have a high percentage of tax-free super benefits you should seek professional advice before taking any action.

Can we still operate a SMSF after leaving Australia?

My wife and I are contemplating returning to the UK to live for family reasons after 30 years here in Australia and becoming citizens. We are both retired, aged 73 and 66, years and have an Australian SMSF. We would like to know how long we can continue to operate it from the UK, and where we would pay any tax due because of the amount we have and the fact that we both draw a Centrelink pension. We currently pay no tax on our super fund income.

You will have up to two years after leaving Australia before being non-residents would be a major problem. For an SMSF to continue receiving the tax benefits as a regulated super fund, there are two tests that must be passed.

The first requires the central management and control of the fund to be ordinarily in Australia. The second requires that there be no active members of the fund (an active member is someone making contributions to the fund), or if there is an active member they hold at least 50% in value of the fund.

As you will be residing in the UK you will not be able to pass the first test unless you have someone take over central management and control of your fund. In most cases this will involve your SMSF becoming an APRA-regulated super fund by appointing a professional trustee company to take over trustee and management duties.

You could still pass the management and control test if you plan to regularly visit Australia at least annually. If all of the investment and other management decisions of your SMSF were left until you visit Australia this test would be passed.

As you are both retired and in pension phase you would not have any active members and therefore would pass the second test. Tax will be payable by your fund as it always has been after lodging its tax return. You will more than likely be taxable in the UK on the pension income you are receiving. You should seek professional advice both here and from a UK accountant before making any decisions.

Are there special reporting requirements for shares in a SMSF?

I am 51 and have a SMSF with a balance of $400,000. I also receive a Commonwealth PSS pension of $30,000 per annum. My intention is to put about $100,000 per annum into the SMSF via the statutory contribution (plus some salary sacrifice, which will take it up to $25,000), the $30,000 PSS pension and another $45,000 in post-tax contributions. I do not intend to retire until I am at least 60. I currently have the SMSF split 50% cash and 50% blue-chip shares yielding about 8%. Is there any requirement in terms of SMSF reporting that I need to be aware of for the shares I have purchased?

I understand that you will be making $25,000 as concessional contributions made up of your employer’s contributions and the amount you are salary sacrificing. The balance of $75,000 will be made up of non-concessional contributions.

There are no special reporting requirements needed for the shares you are buying in your SMSF. You must however make sure that the investment strategy for your SMSF includes investing into direct shares and that you retain all documentation related to the share transactions.

Is capital gains tax payable on shares of an inherited house?

I, my mother, my sister and brother inherited a quarter each of our family home in 1962 when our father died. My brother predeceased the remainder of the family in 1989 and he willed his quarter share equally to the three of us. My mother died in April 2010 and my sister and I were willed half each of our mother’s share.

The house remains unsold and I understand I will be liable for some capital gains. Can you give me some idea as to how the ATO might treat it all for CGT, from which dates, and on what gains are capital gains to be paid.

Your sister and you each have an asset made up of three parts. The first part is the quarter shares you inherited in 1962, which is before 1985 when capital gains tax was introduced, and no tax will be payable on any gain made on these quarter shares.

The share of your brother’s inheritance could possibly have capital gains tax payable on the difference between the market value at his date of death and the value when the property is sold.

On the share of the property that was owned by your mother, and assuming she lived in the home until her death, the primary residence exemption applies for up to two years after the date of her death.

This is a complicated area of capital gains tax and there are many issues that will need to be dealt with in relation to this property. There is the possibility that your brother's share of the residence could also receive the primary residence exemption and, in addition, the two-year period for your mother’s share could be extended. You need to seek professional advice to make sure you are maximising your tax advantages.


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