Ask Max: Your questions answered

This week's questions cover SMSF costs, trading strategies and how to transfer DIY management to your children.

PORTFOLIO POINT: Accounting costs and SMSFs. Share trading strategies. The complications of DIY transfers. How to take a minimum pension.

Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. It’s that experience working with private investors that has led to the Ask Max column, to provide expert advice to Eureka Report subscribers. – James Kirby, managing editor

This week:

  • What should my accountant charge for my SMSF?
  • DIYs and Centrelink entitlements.
  • Share trading: cut and run?
  • How to make a smooth management transfer in an SMSF.
  • Minimum pensions.

SMSF charges

In Robert Gottliebsen’s article today, he mentioned the low fees charged by small accountants for self-managed super funds. What range of charges is made for a $250,000 fund?

The range of accounting costs for an SMSF with $250,000 in investments is almost limitless. The accounting fee for an SMSF should depend on the amount of work required to prepare the accounting statements and lodge the tax return. Unfortunately, some accountants calculate their cost based on what they think the job is worth, rather than what the job actually costs.

Another complication is the number of investments an SMSF has. The cost of accounting for a fund with 10 managed funds making up the $250,000 should be a lot less than a fund where the investments are shares in a multitude of companies that are regularly traded.

Despite this, a reasonable range of accounting costs for a fund with $250,000 would be between $1600 and $2800. The cost of accounting will also be higher if the accounting system used provides other benefits for the trustees, such as access to up-to-date information via the net.

Centrelink entitlements

Can you explain why an investment of up to $300,000 in an SMSF is a good idea if you are taking a conservative position in, say, bonds? Income splitting under the new tax scales mean you won’t pay any tax anyway.

Another consideration in addition to tax is Centrelink entitlements. In the above situation, the $300,000 will have deeming rates applied that result in $12,384 in deemed interest counted under the income test. This would produce a decrease in the age pension of $106 per fortnight.

If the $300,000 is instead in an SMSF, and income is taken as an account-based pension, the amount received is reduced by the purchase price of your pension. This is calculated by dividing the value of your super when you started the pension by your life expectancy.

In your case, with $300,000 and, say, a life expectancy of 20 years, your deductible amount would be $15,000. If you received a pension of $18,000, only $3000 would be counted by Centrelink as income. If you had no other assets or income, your age pension would be subject to the assets test and reduced by only $52.50 a fortnight.

Trading strategy

I have actively been buying and selling shares for four years with one of Australia’s largest stockbrokers. When I first met them, I told them that I would invest some money, that it was all borrowed from the bank and that my initial agenda would be to at least match the bank’s interest charges annually. Four years later, they have never achieved this and I am constantly chasing my tail trying to recover what I have lost. Do I cut and run or keep trying?

It sounds like you have been involved in share trading, but using a share broker to make your trading decisions for you. I prefer to place a limit on how much of my portfolio is used for speculative investing, and with the balance I concentrate on companies producing good dividend yields that have a chance of increasing in value.

By doing this, I am at least producing income to reduce my interest cost, and producing more from the shares than the interest cost. Although there are no sure things when it comes to investing in shares, some companies are producing fully-franked dividend yields of better than 6 per cent.

Generational transfers

My wife and I have an SMSF in full pension mode, with a capital value of $1.5 million and earnings of $120,000 per year. We are in our 70s and enjoy good health. We have two children in their 40s, and as a strategy to avert the complications if one of us departs via a coffin, I am considering having my children join our SMSF by making a nominal non-concessional contribution of, say, $5000 each.

The ultimate objective is to make future larger contributions and transfer the management of the SMSF to them as a future generational change. Am I correct to assume the basic complications would be:
1. Our accountant would have to issue four individual statements within the SMSF Annual report.
2. We would need to segregate the pension assets and the children's accumulation funds (in a separate bank account).
3. We would need to consult them re the operation and management of the SMSF (consultation relative to each member's invested capital).
4. The trust deed would need to be amended to have our objectives incorporated.

The complications you have listed are in fact not your main problem. A way of ensuring a smooth transition of management when you both pass away would be to appoint a company to act as trustee and have your children become directors of that company. They could also be members with a small balance, but that is not necessary.

Your main problem will be that when you both die, the balances of your superannuation accounts must be paid out of the SMSF. This is because your children will not be classed as dependants and your superannuation must not remain in the fund. You should seek advice from an accountant or lawyer that specialises in SMSFs and estate planning issues.

Taking a pension

Your answer "when a member dies" of February 24 left me with a couple more questions that I believe are relevant to all SMSFs in pension phase:
1. By "minimum amount of pension to be paid", do you mean the pro rata minimum percentage amount up until the date they deceased? If so, should we all take our periodic (minimum) pensions on the first day of the period in which they fall due? I feel most people like us would take them at the end of the period.
2. Are the circumstances different if it is not the final member?

The minimum pension that must be taken is the pro rata amount based on their date of death. An option is, as you suggest, paying the minimum amount at the start of the year, to make sure problems are not created when a member dies. This can, however, lead to tax problems, as the pension will be received at the start of the financial year and will earn income if it is not immediately spent.

Another option would be to have the minimum pension paid as a monthly amount at the start of each month. This would be a good tactic that will lead to the minimum pension being paid and not too big a tax problem if it is paid at the start of the year.

The circumstances related to the minimum pension do not change if the member that dies is the final member.

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