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.
- Am I worse off under the new tax rules?
- Can I act as sole trustee of my fund?
- Can I specify ETFs in an industry fund?
- Winding up a fund if one member dies
- Is excess income earned in super concessional or non-concessional?
- Are there maximum limits on the amount of pension drawn down?
Am I worse off under the new tax rules?
As a 58-year-old on a transition to retirement pension, with little income other than a pension drawn from my DIY super fund, for the past two financial years I have drawn a maximum of $37,000 pa. Due to the 15% rebate offered under TTR tax rules, this meant that I was not subject to any further income tax.
The new income tax scale announced as part of the May 2012 budget, however, eliminated the 15% tax scale and replaced it with a 19% rate which applies to incomes above the new elevated threshold of $18,200. The upper limit of this new “first tier rate” has remained unchanged at $37,000.
Any basic mathematical assessment tells me that I must be worse off, if I am to draw the same annual income of $37,000 from my super fund. That is, seemingly, I will now be subject to the 4% “gap” for income drawn between $18,200 and $37,000. Have I missed something, or have many TTRs, (including myself), just been shafted ?
Surprising as it may seem, you’re actually slightly better off as a result of these tax rate and threshold changes. In addition to these changes there was also a change to the Low Income Tax Offset that reduced from a maximum of $1500 down to $445.
Under the old rates tax on an income of $37,000 tax was payable of $4650, while under the new tax rates and thresholds tax on $37,000 is $3572. This means on purely income tax grounds you will not be paying more tax on your TTR pension. After taking account of the changes to LITO, tax payable under the old rates on $37,000 was $3430, while under the new LITO and rates the tax payable is $3127.
Can I act as sole trustee of my fund?
I am the sole member of my SMSF, and my wife and I are the trustees. I have a query about a clause in the Trust Deed in the section “Trustee – Appointment and Removal”. The clause states:
“Where the number of persons acting as Trustee is reduced below the number originally appointed, or holding office at any time, there shall be no obligation to appoint an additional Trustee notwithstanding that the number of Trustees may be reduced to one only and any acts of the remaining Trustee shall be of full force and effect.”
The inclusion of this clause in the Trust Deed indicates that should my wife cease to be a Trustee, say due to incapacity or death, I may continue to run the fund as sole trustee. Is this a correct interpretation, and if so is the clause valid under the Superannuation Industry (Supervision) Act 1993?
You are right to question the validity of this clause in your trust deed. Where individuals act as trustees of an SMSF there must be at least two. The only time an SMSF can have one individual effectively in control as trustee is when they are the shareholder director of a trustee company.
Can I specify ETFs in an industry fund?
I am in two industry funds, only due to low fees. I believe you can only specify the vaguest investment categories in these funds such as for example “international shares.” Is it possible in any local low-cost super industry funds to specifically investment in ETFs or shares overseas that you specify. I am only aware that Australian super allows investing in a few specified Australian shares and that’s all.
To my knowledge there is no industry fund that allows members, as a part of their investment options, to invest in ETF’s or directly into international shares. I’m not even sure whether any of the public offer commercial funds allow direct investment into international shares.
Winding up a fund if one member dies
We have a two member/two trustee SMSF. If one member dies and the surviving member wishes to wind up the fund expeditiously, is it necessary either to appoint another trustee or convert to company trusteeship with the surviving member as the sole director before the wind-up can take place, or is the surviving member/trustee able to wind up the fund him/herself?
In the event of the death of a member, and the surviving member wants to wind up the SMSF; the personal legal representative of the deceased member takes their place. In many cases this will be the deceased’s executor. This does not automatically happen and you should seek the assistance from the SMSF administrator or auditor to make sure that the winding up of the fund can be carried out as efficiently as possible.
Is excess income earned in super concessional or non-concessional?
Some clarification on the matter of contributions. I have an SMSF with my wife. We are in pension phase. I am aged 64 and my wife is aged 63. We take a pension amount from the super fund as per the minimum limits and allow the amount above the pension to remain in the super for reinvestment purposes. Is this capital growth amount subject to the rules governing “super contributions” as non-concessional?
As your SMSF is in pension phase it does not pay income tax on the income it earns. When the pensions paid to members of an SMSF total less than the income earned by the fund the excess is added to each member’s account.
When a pension is started in a super fund the percentage of non-concessional tax-free benefits is calculated and remains the same for the period that the pension is paid. This means any excess income earned by your super fund will in fact be made up of both concessional taxable super benefits and non-concessional tax free benefits.
Are there maximum limits on the amount of pension drawn down?
Max your advice on maximum and minimum withdrawals for SMSF members in pension mode is vague and possibly wrong. The ATO states that “There are no maximum draw-down limits for pensions commenced after September 2007 (except for transition-to-retirement pensions)”. There is no need to stop a pension, withdraw a lump sum and re-start it. My understanding is that one can pay a pension (as a single lump sum if convenient) for any amount that meets the minimum draw-down limits. Is that wrong?
The only time that there are maximum limits put on the amount of pension taken is when a person is receiving a transition to retirement pension from a super fund. In this situation they cannot pay more than 10% of the value of the fund as a pension.
For account based pensions you are right that there is no maximum drawdown limits and there are only minimum payment requirements. This minimum pension payment amount can be paid in any way decided by the trustees/members of the fund. It could be paid as regular monthly payments or as one lump sum at any time during the financial year.
A common practice among many members of SMSFs is to pay a lump sum pension payment at the end of the financial year. The rationale behind this is that the income earned in the SMSF will be tax-free, and by paying it at the end of the financial year the member will not generate extra income and therefore not increase their personal income tax for that year.
There is, however, a risk with this strategy. If a member dies and they have not received the minimum pension payment the fund will not be regarded as being in pension phase and it will pay income tax on the income earned.
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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