Ask Max: Your questions answered

Joint ownership of property, paying off a mortgage from a SMSF, rolling over government funds, unit trusts and salary sacrificing.

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 have joint ownership of a business property with my fund?
  • Should I use my SMSF money to pay off my mortgage?
  • Can I roll my government superannuation into a SMSF?
  • How do we go about setting up a unit trust?
  • What are the benefits of drawing out super while still contributing into my fund?

Can I have joint ownership of a business property with my fund?

I wish to purchase a property from which to conduct my business. Is it permissible for the property to be 50% owned by me or my family trust, and 50% owned by my SMSF? Can I borrow money which I would then put into my SMSF and then purchase the 50% share for my SMSF?

One of the few exceptions to superannuation members benefiting from an asset owned by their super fund relates to business real property. This means the members of a super fund can rent business property owned by the super fund and the fund can even buy business property from members.

There is also nothing stopping a super fund jointly owning business real property with members as you are proposing. If you borrowed the money it is best if the property being purchased is not used as security for the loan. It also does not make much sense in borrowing to make a super contribution to the fund as the interest would not be tax-deductible. Before implementing your strategy you should seek professional advice.

Should I use my SMSF money to pay off my mortgage?

I 68, retired and have an SMSF with approximately $350,000, an inner-Sydney apartment (value approximately $1,000,000 – nil mortgage) plus a unit in Mosman (value approximately $600,000 – mortgage $325,000). I will be spending six to 12 months travelling in Europe in 2013, mostly financed by the rental income from the inner Sydney property.

The annual rental income of approximately $30,000 from Mosman will cover costs and will break even. Given that income is to be maximised, what are your thoughts of using the SMSF money to pay off the Mosman mortgage of $325,000, with the remaining $25,000 invested in high dividend stock, thus folding up the SMSF?

On return from Europe I will reside in the Mosman apartment. I read an article recently that stated that once a SMSF is in pension mode, the members can move into a residential property held by the SMSF. Does this apply to a transition to retirement pension or full pension only? What are the rules relating to this?

A superannuation fund cannot rent a property to members, unless it is business property, as super funds that rent property to members and all related parties have that investment counted as an in-house asset. Under the in-house asset rules the market value of these investments cannot exceed 5% of the total value of the fund.

This ban is not altered whether the member is in accumulation or pension phase. This is because there is a ban on taking a pension as in-specie payments. Allowing a member in pension phase to rent a property without paying rent would effectively mean the member is receiving the value of the rent they should be paying as an in-specie payment.

As you are over 65 and not working, and given the tax-free nature of the pension that you receive from your SMSF, it does not make a lot of financial sense to pay off the mortgage from the funds you currently have in your SMSF.

You may in fact be a lot better off financially, and not be passing on a capital gains tax problem to the beneficiaries of your estate, if you sold the apartment after returning from overseas and use those funds to pay off the mortgage.

From what you have described you are a prime candidate for receiving tax and retirement planning advice from a fee for service advisor that specialises in these areas to make sure you are maximising your taxation and financial benefits.

Can I roll my government superannuation into a SMSF?

I am 59 and have a SMSF in accumulation phase with my wife and I as trustees. Outside of this I have a modest amount in a government super fund from days when I was a government employee. Can I roll this amount into my SMSF? My tax advisors said they are not allowed to give advice on this but noted that there might be a rule about requiring an element of life insurance outside of the SMSF, which of course the government fund gives. If I roll over the government fund into the SMSF I would be without any life insurance.

Your ability to roll the balance of your government superannuation into your SMSF will depend on the rules of that super fund. Some government super funds are defined benefit funds, where either a lifetime pension or guaranteed lump sum are paid, that can have restrictions in place in relation to rolling out a member’s superannuation balance.

Most government superannuation funds are made up of untaxed benefits. This means if the superannuation is rolled out into a taxed super environment tax is paid at 16.5% up to a value of $1.155 million. If you have life insurance in the government super fund you should not close this fund until you have taken out insurance either in your SMSF or outside of it. You should contact the government super fund and find out what you can and can’t do.

How do we go about setting up a unit trust?

A group of friends and myself are interested in pooling some money together to start a unit trust to invest in some high-quality stocks. We have already started an investment club in which we are able to discuss the stocks we like but want to set up the unit trust to purchase the stocks we like. How do we go about setting up the trust, what do we need to consider and what tax and legal documents are required?

To set up a unit trust, a trust deed must be set up as the first step. This can either be done by a solicitor, which is probably the most expensive option, or by a company that specialises in the formation of companies, trusts and other legal entities. If you are wanting to have special rules relating to when and how units can be sold, and the valuation to be placed on the units, you more than likely will need to have a special deed drawn up by a solicitor.

Once the unit trust has been drawn up a tax file number will need to be applied for the trust. The next step will be to open up a bank account for the trust. As a part of the setup of units will be issued to each member of the trust to provide the capital needed to fund the different share purchases. The capital value of the units would be banked into the bank account and the unit trust would start its investment activities.

What are the benefits of drawing out super while still contributing into my fund?

Could you please explain any benefits of drawing down your super whilst still salary sacrificing to the maximum allowed. We have both turned 60, are still working and in an industry super fund. I have read in a previous question that we can contribute to another accumulation account within our fund?

If you are already salary sacrificing the maximum amount the benefits of starting a transition to retirement pension are not as great. This strategy is often used by someone 60 or older to produce a tax free pension that enables them to maximise the amount being contributed to superannuation.

One of the benefits for you in this strategy would be having no tax payable on the income earned by the super fund for the superannuation in pension phase. Your current accumulation account would be rolled into pension phase and a new accumulation account would receive any future contributions. If as a result of receiving the pension excess income is produced this can be contributed as a non-concessional contribution increasing your tax free benefits in the fund.