Ask Max: Your questions answered

Enjoying super assets, contributions in pension phase, transferring shares, and insurance bonds.

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 I enjoy my superannuation assets after retirement?
  • What do I need to do to make a non-concessional contribution in pension phase?
  • Should we set up a SMSF and transfer our shares into it?
  • Can I use an insurance bond to reduce my assets for pension purposes?

Can I enjoy my superannuation assets after retirement?

Whilst I am aware of the ATO’s arms-length rules I am confused by reading statements that include the words “until retirement”. If I am retired and drawing a pension, can I have a night a year in a holiday house or make use of a garage in a rental property owned by my super fund? What government restrictions could complicate an investment in residential property within a SMSF?

Because superannuation is meant to provide benefits when a person retires, members of a super fund are unable to receive a benefit from superannuation before this. In technical terms the person cannot receive a benefit from a superannuation fund until they have met a condition of release. Retirement is one of the conditions of release.

For someone under 60 retirement this means ceasing employment and not intending to work for more than 10 hours a week. For someone aged over 59, but less than 65, the condition of release is ceasing employment with one employer. Once a person turns 65 they have unfettered access to all of their superannuation.

This means where a super fund owns a property a member cannot receive any benefit from that property. In the two examples you have given, a week in a rental property or using a garage would be regarded as receiving a benefit prior to retirement and could not be done. The only restriction on an SMSF owning a residential property is that cannot be purchased from a member.

What do I need to do to make a non-concessional contribution in pension phase?

My wife and I are the two trustees of our SMSF that is in the pension phase. I plan to make a non-concessional contribution, and being over 65 but under 75 years a work test is required. Before making a contribution is it necessary for the fund to revert to a contribution phase for the event? If so, what is the procedure and is it sufficient to inform the trustee by communication in a letter or minutes of a meeting. I assume this transition out and in of the pension phase will occur in a day, and is there a tax implication?

There is nothing formally that you need to do to make a new non-concessional contribution to your super fund even though you are in pension phase. By making the contribution a new accumulation account will be created for you. There is no requirement for you to finish your pension and roll it back into accumulation phase.

After you have made the non-concessional contribution you can either start a new pension from this amount, or cease the existing pension, roll it back into the accumulation account that you have made the non-concessional contribution to, then start a new pension from the combined amount. Before doing this you should seek professional advice as you could be disadvantaged if you cease your existing pension.

Should we set up a SMSF and transfer our shares into it?

Currently my wife and I have shares worth over $1 million under individual names outside the company super schemes we work for. We are both 50 years old. Do you think it makes sense to transfer our shareholdings to a SMSF which we have not set up, but are currently thinking about setting up? If it makes sense, how do we go about setting up a SMSF? Will there be any CGT with the transfer? 

There are several choices open to you for setting up an SMSF. The main thing to be aware of is that the cost of setting up an SMSF can vary greatly depending on who you use. Setting up an SMSF with individuals acting as trustees should cost between $400 and $700. If you decide to have a company act as trustee for the SMSF the cost will be approximately $700 more.

You should be careful in choosing the cheapest alternative when setting up an SMSF because the services often come with many conditions and restrictions. A good starting point when considering setting up an SMSF is to go to the Self-Managed Super Fund Professionals Association of Australia’s website. After entering your postcode you will be provided with a list of SMSF specialist advisers in your area.

Depending on when you purchased your shares, and whether they are worth more now than when you bought them, there is a high likelihood that capital gains tax would be payable upon the transfer into an SMSF. You should therefore seek professional advice so that the CGT implications of what you are proposing can be fully reviewed.

Can I use an insurance bond to reduce my assets for pension purposes?

I have read that by investing in insurance bonds I can transfer money to my children. I am 63 years old, and want to bypass the restriction on only being able to gift a small amount of money each year, since they may gain access to the bonds after 10 years. If I understand correctly this will increase my eligibility to the government pension by reducing my assets, since my money will be held as insurance bonds.

I am not sure how this would work in practice though. If I were to buy insurance bonds with a view to my children gaining access to them after 10 years, would I be able to gain access to the money myself, if I needed it, before that date?

There are many benefits from purchasing an insurance bond; unfortunately one of them is not to improve your eligibility for a Centrelink age pension. The way insurance bonds work is that you take out a policy on your life with funds being contributed by you in a lump sum, or an initial small lump sum with regular payments thereafter, and you can name who you want to benefit from that policy.

As you are using personal money to purchase the bond this will be classed as a financial asset by Centrelink. This will mean it will be counted as an asset under the assets tests and have the deeming rates applied to it so that you would also be affected by the income test.

Care needs to be taken when purchasing an insurance bond as they basically fit into two categories. There is the older and more traditional type of bond where the insurance company credits the bond with income each period. The other type of more modern bond allows the owner to select from as many as 30 fund managers and different types of investments. The income earned by the bond in this situation depends on the performance of those managers and not the generosity of the insurance company.

Where an insurance bond is held for 10 years or longer the increase in the value when cashed in is not taxable. If the bond is cashed in between years eight and 10 of commencement a percentage of the increase in the value is not taxable. For a bond cashed in before eight years the increase in value is taxable but a 30% tax offset, similar to that of a franking credit, is received.

As the owner of an insurance bond you can choose to have the proceeds pass upon maturity to the people you want to benefit from the bond, such as your children. Also, as the owner, if you need the funds for your own purposes you can choose to cash all or some of the bond at any time.

Before investing in a bond you should seek professional advice from a fee-for-service advisor, who can assess whether you will receive a benefit from this type of investment.

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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