Ask Max: Your questions answered

Paying tax before pension mode, accidently breaching the contributions limit, renting to a former spouse, reversionary pensions, and corporate trustees.

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:

  • Will my earnings be tax free before I move into pension mode?
  • Breaching the concessional contribution limit because of a bank error.
  • Can I rent my SMSF property to my former spouse?
  • Making a pension reversionary and the approximate cost?
  • If I use a corporate trustee, do I need other trustees?

Will my earnings be tax free before I move into pension mode?

I understand that when my SMSF changes from accumulation to pension mode, earnings within the fund become tax free. I intend to do this on my 55th birthday, which falls on 29 June. Will the earnings tax-free status apply for the whole financial year or only for the period after going into pension mode?

Income tax is not payable on income earned by a super fund that is used to pay a pension to a member. In your situation, as the pension will only be paid for two days, the income generated over that two-day period will not be taxable.

Breaching the concessional contribution limit because of a bank error.

I turned 65 on August 31, 2012 and no longer work. For the 2012/2013 financial year I made, prior to my birthday, a $25,000 concessional contribution and $450,000 non-concessional contribution to my SMSF. Last month I requested my bank teller to withdraw $1,000 from my SMSF bank account to my personal account as a pension payment. The bank teller in error processed the transaction the other way and transferred $1,000 into the SMSF bank account instead.

Upon discovering this error I requested bank to rectify the transfer, which they did. I also requested that they provide a written statement that it was their processing error. Will I have a problem with the ATO considering this amount to be an excessive non-concessional contribution? Can I treat it as a temporary administrative error that has been corrected and no disclosure required?

As the incorrect contribution resulted from the bank error, there should be no adverse consequences for your SMSF. With the reversing of the transaction by the bank the problem has effectively been fixed. To be on the safe side you should contact the accountant or the auditor for your SMSF and advise them of what has happened provide them with the letter from the bank.

Even if there was a technical breach of the contribution limits the ATO has stated that, where small excess contributions would result in disproportionately high penalties, they will not impose excess contributions tax. Even if the ATO had not announced this new policy, and they decided to impose excess contributions tax on the administrative error, you would have good grounds to appeal this decision with the administrative appeals tribunal.

Can I rent my SMSF property to my former spouse?

I had a question in relation to the SMSF regulations around property rental. Am I able to rent out my SMSF property to my former spouse? If the answer is yes, then what happens if my adult children then decide to live with her in the future? Would that be conditions for non compliance? Bear in mind that she would be the lessee or the property.

Under the superannuation regulations if a superannuation fund rents a property to a member or related party the property is counted as an in-house asset. Under the in-house asset rules the value of all in-house assets cannot exceed 5% of the value of the fund. Given the high value of a property investment, if the property was rented to a member or related party, in most cases the in-house asset rules would be breached.

The definition of a related party includes the spouse of a member, and any relative of the member and their spouse including a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child. The in-house asset rule cannot be bypassed by allowing a related party to occupy the premises rent free. This is because super funds are banned from providing financial assistance of any kind to a member or related party.

In your situation your former spouse would not be classed as a related party and if only she occupied the property the in-house assets rule would not be breached. Unfortunately if any of your children decided to live in the property, as they are classed as related parties, this could automatically trigger the in-house asset rules.

Making a pension reversionary and the approximate cost?

I have a SMSF with a corporate trustee, I am the only member, trustee and director of the trustee company. I have read an article about auto reversionary pensions. What is involved in making my pension reversionary and the approximate cost of these changes? Would my former spouse be qualified to be recipient of reversionary pension?

My understanding that spouse or former spouse are both considered by ATO as a dependants.

What will happen to the corporate trustee structure and super fund when I die? Are there any additional steps that have to be undertaken to preserve the existence of my SMSF?

If you have already started an account based pension you would need to cease this, roll back into accumulation, and then commence a new reversionary pension. Before doing anything you should check your SMSF’s trust deed to make sure a reversionary pension can be paid. Your trust deed could also detail what documents must be completed for a reversionary pension to be commenced.

With regard to the cost of commencing a reversionary pension this can vary greatly and will depend on who you use. There are a number of companies that provide the documentation for commencing a reversionary pension which is very expensive. In many cases unnecessary documentation, if it is not required by your trust deed, is included to give the impression of value for money.

Your super fund will more than likely have an accountant or administration company looking after many of its statutory requirements. You should contact them first to see what they would charge for drawing up the appropriate documentation.

With regard to having your former spouse as the beneficiary of a reversionary pension she needs to satisfy the SIS definitions of a dependant, as reversionary pensions can only be paid to a dependant. Under the SIS act a dependant include your spouse, de facto, any of your children, and any person you have an interdependency relationship with. As such the SIS act does not automatically include a former spouse.

For you to have an interdependency relationship with your former spouse there would need to be a close personal relationship, you live together, you provide her with financial support, and one of you provides domestic support and personal care to the other. The requirements for there to be an interdependency relationship are not rigid and you should check with the auditor of your fund to see if your former spouse can qualify to be a reversionary pensioner.

If I use a corporate trustee, do I need other trustees?

I have an SMSF with my son, who lives in Sydney and is a trustee. This causes delays when we both have to sign a document as I live in Queensland. I have been told that if I use a “corporate trustee” I don’t need to have my son or anyone else as a trustee. What is the procedure to follow, if this is the case?

What you have been told is correct. Having a company act as trustee for your SMSF means that you could be the only director of the company and therefore from then on only one signature would be needed on any documentation related to your SMSF.

Your trust deed should state what is required to appoint a new trustee of your SMSF. You will more than likely need to seek professional advice from an accountant or a company that specialises in providing document services for SMSFs to appoint the company as trustee.

In addition to the documents required to appoint the new trustee you will also need to change the owner of all of the investments of the SMSF from that of you and your son to the new trustee company.


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