Ask Max: Your questions answered

Pooled investments through an SMSF, contribution limits and splitting, and calculating risk and reward.

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:

  • SMSF purchases through a pooled investment structure.
  • Contribution limits, and splitting concessional payments.
  • Calculating a fund’s value for pension purposes.
  • Is my super investment strategy right?
  • Making in-specie share transfers.

Are pooled investments through a broker legal?
I am a trustee of a SMSF with total assets of about $4.5 million. Personally, I meet the requirements to be classified as a “sophisticated investor”. I have been buying corporate bonds for the fund through a broker that combines purchases from investors so that, rather than investing $500,000 each time, I have been investing about $100,000 for each purchase.

In an article I read the writer raised doubts about the legitimacy of such transactions. Is there anything wrong with this as an investment for my SMSF?

I did not see the article and am not sure what doubts the writer raised. As long as the investment strategy of your SMSF includes the ability to purchase bonds there is no regulatory reason why you cannot invest in them.

Understanding contribution limits
Would you please explain the $500,000 limit used in calculating contribution limits to apply in two years time? I am 55 years of age and have close to $100,000 in an untaxed fund which I am able to withdraw or rollover to my SMSF, which has around $350,000 in it. I was considering withdrawing the $100,000 and putting it in my partner’s mortgage offset account, and in that way most likely keep my super under $500,000. I realise it means paying 16.5% tax on withdrawal rather than 15% to roll-over, but the savings in interest will offset the current returns on the untaxed super.

Until the legislation has been passed about the $50,000 contribution limit applying to people 50 and over, it is difficult to provide a definitive answer. On the basis of the announcement in the budget, people with less than $500,000 in super, that are 50 or older, will be able to make a concessional contribution of up to $50,000.

According to some articles I have read, the $100,000 you are thinking of having paid out will be counted in the $500,000 limit, so taking it out may not achieve anything. One thing you should consider doing is splitting 85% of your concessional super contributions with your partner. This would help keep your super balance below the $500,000 limit. You could start doing this with the 2012 contributions.

You could also look at using the $100,000 to make a non-concessional contribution for your partner. Once your partner has reached retirement age a tax-free transition to retirement pension, or an account-based pension if they have satisfied a condition of release, could be commenced to produce largely tax-free income to help pay off the mortgage.

Calculating for a pension
I have a SMSF in the pension phase. To calculate the fund value on July 1, I use the total of funds in bank accounts plus the value of shares at the close of trading on the last trading day of the financial year. I do not include franking credits held by the ATO since I will not receive them until after my fund has been audited and the tax return processed. Is this the correct procedure?

I take it that you are using this value to make sure you are taking the minimum pension payment required. Your method will at least provide a good estimate of what that minimum pension needs to be. To be able to accurately determine what minimum pension must be paid you will have to wait until the final audited accounts and members statements have been prepared.

Is my super investment strategy risky?
I am 60 years old still working and intend to retire in two years. My wife works part-time and will also retire in two years. Our combined income before tax is approximately $80,000. I am taking a transition to retirement pension of $30, 000 and also salary sacrificing $35,000 into another super account.

I have approximately $650,000 in my two super accounts and my wife has $75,000, all of which is invested in the cash option. Our house is paid for, valued at $750,000. I have no other loans or commitments and have very little cash outside super. I have another defined benefit super account which I can access when I retire that will provide an approximate payout of $450,000.

I have taken an interest only line of credit loan against the equity in the house of $600,000 at 6.6%. I am thinking of putting $15,000 into my super account before June 30 and another $450,000 after July 2012 and start another TTR pension. Any income from this pension will be tax free.

Although I will be paying 6.6% interest on $600,000, I am hoping to invest part of the new pension funds into a little more aggressive option to cover my interest payment and maybe make some profit. I understand the interest payment will not be a deductible expense but on the same token any income and capital gain will also be tax free in the super environment.

With all this uncertainty in the global financial system, I am bit reluctant to exercise my idea. I would like to have your views on this strategy?

What you are proposing is highly risky and I am not sure if you will actually be any better off. From what you have said, by the time you retire you will have at least $1.2 million in superannuation.

Your first step should be to work out how much income you will need in retirement to fund your desired lifestyle. Once this has been worked out calculations can be done to work out how long your superannuation will last. If it turns out they will last for the rest of your estimated life you would be doing something incredibly risky for no gain.

It would be a lot better for you to look at some higher income returning investments, such as unlisted property trusts, bonds and mortgage funds, before embarking on your strategy. You could also look at investing directly into some shares that produce high dividend yields. For example, CBA has a yield of just over 6% fully franked that equates to a yield of over 9%.

Whatever you decide you should seek advice from a fee for service professional who specialises in retirement, investment and tax planning before taking any action.

Changes to in-specie transfers
In recent years I have been using excess cash from dividends or the sale of equities in my SMSF to pay for the off-market transfer of shares into my SMSF from equities I have outside of the SMSF. The proposed changes to off-market transfer of equities into super from July 1 are not clear to me as to whether I can continue this practice.

The issue for me is that I will still have the excess cash available to me in super and will have to make a formal contribution to super from the sale of shares outside of super, where presently I’m simply paying for the shares to be transferred in. I would appreciate your advice as to any suggested strategies to achieve the same outcome if the proposed changes prohibit my current practice.

I don’t quite understand the relevance of the cash being produced in your SMSF and how it relates to making an in-specie contribution of the shares you own outside of super. When a share is transferred into a super fund as an in-specie transaction it is counted as either a concessional or non-concessional contribution.

Once in-specie contributions are banned you would simply sell your shares on the market, contribute the proceeds to your SMSF, and then purchase them on the market. From my experience the work involved in off-market transfers far outweighs the small brokerage costs that apply.

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.

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