Ask Max: Your questions answered

Adding family non-fund members as trustees, winding up a SMSF, the sole purpose test, and how much insurance?

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:

  • Can family non-fund members be extra trustees?
  • Can we wind up our super fund?
  • Will my clients satisfy the sole purpose test?
  • Can our children roll over their super into our SMSF?
  • How much insurance, and what types, should we have?
  • Can I transfer my property to my fund, and is stamp duty payable?

Can family non-fund members be extra trustees?

I have a grasp of the need for members of an SMSF to be trustees and I am also aware that there may be only one member of an SMSF if there is another trustee such as a family member. However I have not seen anything on the ATO site that specifically prohibits having more than one family member as trustees, but not members. What do you think?

If your trust deed allows it there is nothing to stop you being the only member/trustee and having two family members as extra trustees.

Can we wind up our super fund?

I and my wife have a SMSF that we no longer need. I am 72 and she is 55. We would like to close it down. My wife’s official retirement is at age 65. Does that mean she has to continue with her super until she turns 65?

As long as your wife has met a condition of release, which in her case would mean her retiring by working less than 10 hours a week, she could access her super and you could wind up the fund.

Will my clients satisfy the sole purpose test?

I have clients who have recently established an SMSF and their intention is to purchase a “house and land” package as the major investment for the fund. They are aged 55 and intend to rent this once built until they retire at pension age. They will probably sell at this time depending on the liquidity of the fund.

Before they proceed they want clarity from the ATO that this will satisfy the sole purpose test. They have applied for a public ruling but the ATO has advised they will not give this ruling. What are your thoughts?

As the property is to be held purely for investments purposes, if the investment strategy for the fund allows the investment, and as long as none of their family or associated individuals occupy the property, they would satisfy the sole purpose test.

Can our children roll over their super into our SMSF?

We would like our son and daughter to join our multi-million-dollar SMSF as members. Can they transfer their current six figure super balances in their respective employer super funds to our fund without incurring CGT or any other complications?

There is nothing stopping your son and daughter joining your SMSF and rolling in their balances from the employer sponsored fund they are currently in. If the investments in their current fund has unrealised capital gains, tax would be payable on their sale to facilitate the rollover.

If your son and daughter are 55 or older they could start a TTR pension first then sell the investments while in pension phase and thus not pay any capital gains tax in the old fund. Before taking any action you should seek professional advice.

How much insurance, and what types, should we have?

I would like your advice regarding life insurance and income protection insurance for my husband and I. He is 41, works as an IT sales/engineering exec with a salary of $265,000 and is paying $102,000 in tax. My salary is $105,000 and I work as an administrative assistant.

We have $20,000 left to pay on our home valued at $1.1 million in the inner-west of Sydney. We plan to pay off the house then start saving for our kids’ private education (now aged 4 and 6). Thereafter we want to upgrade our family home.

I have received a quotation from our newly appointed financial planner for life and income protection insurance, part of which can be funded by our SMSF. My husband’s premiums are $3300 for life insurance, $712 for trauma, and $3312 for income protection. My premiums are $900 for life insurance, $264 for trauma and $2268 for income protection.

Do we both need income protection as well as life insurance? It is assumed that the SMSF will bear the cost of the life insurance, while we will personally pay for income protection, availing ourselves of the tax relief on the premiums.

Our combined SMSF is currently worth around $250,000. We made around $1000 in the last six months through a conservative portfolio, which is not stellar to say the least. I am concerned that the life insurance at around $4200 per year will erode our fund. Also, owning our primary residence (almost) may act as a contingency for life insurance. What do you recommend for us?

There is a two-step process for calculating how much life insurance a family needs. Under the first a calculation is done to work out how much cash and investments are needed when a person dies. This amount is made up of two components.

The first component should ensure that any loans will be repaid. The second component should produce a lump sum payment to ensure there are enough investment and retirement funds to produce an income for the family.

The amount of this second component will depend on the annual income required by the family and the number of years the lump sum will be required to produce the income. The lesser the annual income required, and the older the family is that needs the income, the lesser the amount that needs to be produced from the life insurance.

The second step in the process is to deduct the value of existing investments from the total calculated in the first step. A person's home would not be included in this as an investment. The resulting figure is the level of life insurance needed. In your situation as your husband produces the most income you would normally expect his life insurance cover to be greater than yours.

The method of calculating how much trauma insurance is needed is similar to the method for calculating how much life insurance is required. Another insurance that would normally be considered is Total and Permanent Disability insurance. If for some reason you or your husband could not work TPD insurance would produce a lump sum. This would be used to pay off loans and produce funds if needed for alterations to the house as a result of the person being disabled.

The level of income protection insurance required is normally based on the percentage of the annual income of the person being insured. A better way to calculate how much income protection insurance is required is to first calculate how much income the family needs to maintain their lifestyle.

For someone on a high salary like your husband using the percentage approach to calculate  the level of income protection insurance, and therefore the premium related to the insurance, maybe higher than is needed.

If you are not sure that your current advisor is giving you the best advice, and is more interested in maximising their commissions, you should seek advice from someone who can demonstrate the need for the level of cover recommended.

Can I transfer my property to my fund, and is stamp duty payable?

I currently own commercial land and run a business from it. Can I transfer the land to my super fund and, if so, do I have to pay stamp duty again as it cost me approximately $20,000 a few years ago?

You can either transfer the land as an in-specie contribution, as long as its value does not exceed the contribution limits, or you can sell it to your super fund. There may be stamp duty payable on the value of the property depending on where it is situated. I know of cases where no stamp duty was payable on property located in Victoria and Queensland.

You should seek professional advice on both the stamp duty question and whether you should be transferring the property into your super fund. Depending on its value now, how much you paid for it, and whether you qualify for the small business CGT exemptions, you could end up with a large tax bill on any gain you make if it is transferred.


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