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.

• What are the rules on paying tax from super when a member dies?
• ING Direct, and does a fund in two names get the government guarantee twice?
• Where do I find information on changing to a corporate trust?
• Should I rent out my home and borrow to buy a new one?
• Is a balanced investment plan the best super strategy?
• If I don’t meet the work test, I am liable for penalties on contributions made?

What are the rules on paying tax from super when a member dies?

I just read that dependants will not have to pay death duties when members’ benefits get paid to them from a super fund. Does that mean my husband does not pay if I die, and also because we have a family trust that our sons who are beneficiaries of the trust and in our wills are beneficiaries and will also escape the tax?

There aren’t actually any death duties that exist but you are more than likely referring to when superannuation passes to a dependent on the death of a member that no tax is payable. On the other hand when superannuation passes to a non-dependent, which unfortunately for income tax and superannuation purposes your adult sons would not be classed as dependents, tax is payable at 16.5%.

The investments you hold in your family trust are not affected by superannuation and the normal income tax rules apply. If upon your death the investments are sold in the family trust, and assessable capital gains are made, income tax will be payable by the beneficiaries of the trust.

You may want to consider the strategy of reviewing your financial situation when one of you dies. At this time an analysis should be done as to what value of investments is required in your SMSF to fund the surviving member’s pension for the rest of their life.

Where it can be identified that excess investments are held in the super fund it can make sense to pay these out tax-free to the surviving member, who can then give that money without any tax consequences to whoever they want. Before taking any action you should seek advice from a professional that specialises in this area.

ING Direct, and does a fund in two names get the government guarantee twice?

Is ING Direct as good an option for a term deposit in our DIY super as the big four Australian banks, and does the government guarantee apply? If a fund is in two names does the $250,000 guarantee cover twice?

According to the ING website the investment products covered by the government guarantee include their savings maximiser, savings accelerator, Orange Everyday and personal term deposits. It is my understanding that the guarantee should also cover an ING direct superannuation online investment account.

The $250,000 guarantee applies to individuals and to entities. This means you, as individuals, each get the $250,000 guarantee, but your SMSF only gets a $250,000 guarantee.

Where do I find information on changing to a corporate trust?

Where can I get a checklist of the actions required to enable me to change my SMSF with myself and my wife as trustees to a corporate trust with myself and my wife as directors?

Whenever you are looking for what is required to be done with regard to an SMSF the first place to look is the trust deed for the fund. This should spell out the actions required to be taken to change the trustee of the SMSF. Most of the service providers to SMSFs, including those that set up both companies and self-managed super funds, should be able to assist you with this task including preparing all required documentation.

Should I rent out my home and borrow to buy a new one?

I am a 52 year old female who knows very little about property investing and investing in general. I’m currently mortgage free and own my four bedroom home in Melbourne’s eastern suburbs. I am divorced, and earn $80,000pa with my current job. The last time I got my home valued, which was about two months ago, it was valued at between $640,000 and $680,000.

I originally wanted to sell the home and purchase another smaller property on the coast worth about $450,000-$500,000. My two children have moved out and my current home is too big for just me, and with all the up keep and ongoing maintenance it gets quite stressful so I thought this was the best solution.

However after talking to friends and family, I am now considering the idea of renting my current property (which I’m told should yield about $500-$550 a week in rent), while still purchasing another on the coast to live in, and with the rental dollars I’ll be receiving help pay off the new property so I can retire more comfortably in the coming years.

I believe it would be a mistake if you kept your current home for renting purposes and then had to borrow to buy a new property that you will live in. If you did this none of the interest on the loan taken out to buy your new home would be tax deductible while all of the rental income would be taxable.

In your situation it is normally best to sell your home capital gains tax-free and use the funds to possibly buy a smaller house to live in Melbourne plus a small property on the coast. If you still wanted an investment property you could then use these two properties as security for an investment loan. Before taking any actions you should seek advice from someone who specialises in tax strategy advice.

Is a balanced investment plan the best super strategy?

I contribute to a super fund that has a balanced plan. There is an opportunity to change the balanced plan to my plan. Can I be confident that the balanced plan that is made for me by my super fund is the best possible plan for those of us who stick with that super fund?

Your first step should be to assess what the performance of the balanced plan has been over the last five years and compare this to the other option. Your next step will be to find out what percentage of the balanced plan is invested in the more volatile areas such as Australian and international shares.

Unfortunately many super funds, and most of the financial planning industry, regard a balanced investor as having up to 60% per invested in these more volatile areas. When I construct a portfolio for a super fund I believe that these more volatile investments, when the markets are more settled than they are at the present, should not be more than 40%. In these current turbulent economic times this percentage is even lower.

In my balanced portfolios I allocate up to 25% to fixed interest, 25% to direct property, 30% to Australian shares, 10% in international shares, with the balance being in cash. You should speak to a financial adviser, one that does not charge commissions, to get the advice you need in relation to changing the investment mix of your superannuation fund.

If I don’t meet the work test, I am liable for penalties on contributions made?

I’m over 65 and have been working casually for the past three years, generally about three days per week and salary sacrificing to the limit into my SMSF and not paying any PAYG tax.

This financial year the demand is very low so I’m working sporadically but significantly less than 40 hours in 30 consecutive days (anywhere from 10 to 25 hours) with all earnings being salary sacrificed. What happens if this situation continues to the end of the financial year? Do I refund all the contributions to myself and pay relevant PAYG when submitting my personal tax return? Are there any fines or other consequences arising from this scenario?

The consequences of you not meeting the work test, after your SMSF has already received contributions during this 2013 year, are not worth considering. Penalties could be applied to both you as a member and as a trustee. To avoid any of these possible penalties you must make sure that you work at least 40 hours in a 30-day period before June 30, 2013.

If you are not going to be able to meet this work test you should cease immediately any contributions being made to your fund, contact the auditor of your SMSF to advise them of the incorrect contributions that have been received, and follow any advice they give you.

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