Ask Max: Your questions answered

Determining if a fund is in pension phase, in-specie tax liabilities, corporate trustees and limited recourse loans, non-concessional contributions, and more.

Summary: This article provides answers on determining if a fund is in pension phase, in-specie tax liabilities, corporate trustees and limited recourse loans, non-concessional contributions, auditor requirements, non-concessional contribution laws, super fund joint ventures, forgiving loans, and taxes on property developments.
Key take-out: Even if a super fund has met its pension requirements in prior years, it will not be regarded as being in pension phase if the minimum pension payment has not been made in any year.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Portfolio management.

Is being in pension phase a year-by-year proposition?

I have been receiving an allocated pension from my SMSF for 10 years. I normally only make one payment a year but it can be a couple more. I have not doubted that my account was officially in “pension phase” until I read your article. When I started the allocated pension I had to advise the ATO of the pension commencement. In doing so I assumed I had officially entered the pension phase and that status would hold for my subsequent account-based pension. Are you saying that the “pension phase” is a year-by-year proposition? Should a nominal payment be made early in each financial year to maintain the pension phase status?

For a super fund to be in pension phase it must meet all of the requirements relating to the pension paid. In addition to the member having met a condition of release, and to be entitled to receive a pension, a minimum pension payment must be made. This minimum amount depends on the age of the member at the start of each financial year.

This means that just because a super fund has met all of the requirements in prior years, if the minimum pension payment has not been made the fund will not be regarded as being in pension phase. Rather than paying a nominal amount at the start of the financial year it makes sense to pay the minimum pension requirement in monthly amounts.

In-specie transfer tax liabilities, and making contributions in pension phase

I am a little confused regarding your article which details the potential pitfalls in undertaking in-specie transfers into a SMSF. Your article argues that such transfers result in a capital gains tax liability to the SMSF. Surely this is only the case if the shares are sold by the fund at a profit. A capital gains tax event does, however, arise on the transferor when the shares are transferred to the fund, assuming that this is done at a profit. On another matter, I intend to convert my fund to pension phase next year but have been told that I can still make contributions. Could you please clarify these issues?

A capital gains tax event will occur when shares are transferred in-specie into a superannuation fund by members, and there is a separate capital gains tax event when and if the SMSF transfers shares back to members as an in-specie transaction. Depending on the market value of the shares at the time of each of the transfers there may or may not be a capital profit made.

A superannuation fund can have members in different phases and in fact be receiving several different pensions. If you rolled over the current balance of your superannuation into an account-based pension you would then have a pension account in your super fund. If you later made further super contributions they would be made to your accumulation account, resulting in you having two accounts within your SMSF.

Can corporate trustees act for multiple limited recourse trusts?

If I have a company set up to act as trustee for a bare trust to make a limited recourse loan to purchase a property inside my SMSF, can this corporate trustee act as trustee for more than one bare trust, or is it necessary to create a new corporate trust entity for each property for which you wish to make a limited recourse loan for?

The requirement is to have a limited recourse trust set up for each property purchase, and there should be nothing stopping you having the same corporate trustee acting for several limited recourse trusts.

Can non-concessional contributions be split with a spouse?

My wife is 41 and I am 57. I am about to start a transition to retirement pension (TTR) from July 1, 2013, or at a time suitable to enable a super split. We will both contribute $150,000 as non-concessional contributions in the 2013 financial year and in the 2014 year $450,000 in non-concessional contributions. Can I split my wife’s contribution amount so I get the balance to start a TTR and what would be best time of year to do this? I use a combination of Xero & Sharesight to manage the accounts for my SMSF, which provides all the reports I need to satisfy the ATO.

Only concessional contributions can be split with a spouse. This means the non-concessional contributions your wife will be making must stay in her account. From the point of view of timing, it would make sense for your non-concessional contribution of $450,000 to be made on July 1, 2013 and to commence a TTR pension straight after.

Does an auditor need to audit every share transaction?

Is it a requirement for the auditor to have copies of, and to audit, every share transaction and dividend transaction? They want to put all the info into their own system, which seems like an awful lot of unnecessary duplication to me. Should I be looking for a different auditor?

When an audit is conducted properly only a sample of the transactions needs to be checked, not all of them. This means, strictly speaking, your auditor does not need to verify every transaction. An auditor in fact should not be processing the annual accounts for a SMSF. They should only be auditing accounts prepared by you or your accountant. It sounds like your current auditor is doing too much work to possibly justify their fee, and you should look around for another.

Can two SMSFs purchase a single property?

Is it possible for two separate SMSFs having two trustees each to purchase a single property as tenants in common?

There is nothing stopping two SMSFs purchasing a property as tenants in common. An SMSF can joint venture with other SMSFs or even members.  

Can loan obligations be forgiven by a super fund?

If I make a personal limited recourse loan to my super fund for a property purchase, (legitimately following all the necessary requirements) can I include a clause or condition in the loan agreement to the effect that the debt is forgiven or waived in the event of my death? In other words, effectively making the property unencumbered in the super fund.

You would not be able to have this loan forgiven as this would be classed as a contribution and would be covered by the contribution rules. These would include the contribution limits that apply and also an overriding rule that means a deceased person cannot make a super contribution.

What are the tax obligations on a property development within a SMSF?

I have had a vacant allotment in my SMSF fund for nearly 10 years. It was purchased for $30,000 and is now valued at $120,000. I would like to build a new brick spec house on it, at a cost of $180,000. The sale price would be $ 340,000 after legal fees and the sale commission. Would the profit be $40,000, and is any CGT payable? As I have had the land for 10 years, would the tax be 15% or 10%? What tax would the fund pay? Would the tax be any different if I rented the property for a year before I sold it?

If you sold the land and the house for $340,000 a profit of $190,000 would be made. The current market value of the land would only be considered if it was sold to you and you did the development. With the superannuation fund developing the land the capital gain of $190,000 would have tax paid at 10%. If the super fund was in pension phase no tax would be payable.

Because the fund would be undertaking a profit-making activity, and because the value of the sale of the property would exceed $75,000, the super fund would need to register for GST. The fund could claim the GST charged on the building costs but it would have to include GST in the selling price. Doing a development like this within a superannuation fund is complicated and you should seek professional advice before commencing it.


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