Correcting the calculation of a tax-free component

I AM 58 and my wife is 51, both working part time. In early 2007, I started a self-managed super fund and contributed $450,000 for each for us as non-concessional contributions, using the proceeds from an inheritance. This is all classed as a tax-free component. I invested the majority of the funds in direct Australian shares. As a result of the global financial crisis, the value of the fund fell by about 40 per cent but has now partially recovered. My concern is that the fund, according to my administrator, is now a mix of taxed and untaxed components. Is this correct and is there any way to convert the assets of the fund to tax-free component again? P.B.

I disagree with your fund administrator. The tax-free component is calculated at the time you either begin a pension or roll over the benefit or withdraw as cash. It is then determined as the sum of your non-concessional contributions over the years (whether in that fund or combined with other benefits that are subsequently rolled over into your SMSF), plus any crystallised amounts, that is pre-1983 component and so forth, as at July 1, 2007.

As long as you don't roll over to a new fund, or begin a pension that then fixes your component as they are at the time, you can carry forward your $900,000 in a tax-free component, plus any additional non-concessional contributions made since 2007. Check with your fund administrator and, if necessary, seek a second opinion.

Withdrawal symptoms

My wife and I have just turned 60. We own our home, a small business and a family trust. We have no debts. We never plan to stop work. Our self-managed super fund has $500,000, including a $100,000 salary sacrifice in 2010-11. Can we salary sacrifice another $100,000 in 2011-12 and then take our $600,000, less any tax the fund has to pay, as a lump sum? We plan to retire from the business and employ ourselves in the trust. We want to use this money where we think it will do better than in super. Can we then start to salary sacrifice again in 2012-13? G.L.

To withdraw the money as a lump sum, you need to meet a "condition of release" that allows your preserved benefits to be converted to "non-preserved". The most common condition is complete retirement after age 55 that is, you need to convince the fund's trustees (yourselves), plus your fund's auditor and possibly the Tax Office if it audits your fund, that you intend to never work again. Saying you plan never to stop work doesn't meet this condition, though you wish to retire from your business.

There is an alternative condition of release for people who change jobs after having reached age 60 or, as the regulations spell out, "an arrangement under which the member was gainfully employed has come to an end".

It sounds as though you are self-employed in your business and it is not related to the family trust, in which case the above condition of release can be used. However, if your business is owned by the family trust, then you are employees of the trust and, even though it might cease to operate one business and begin another, your "arrangement" as employees remains unchanged and I would argue you would not be able to use this condition.

The government has announced that people over 50 who each have super benefits under $500,000 will be able to continue to make concessional (deductible) contributions of up to $50,000 in 2012-13. So you should each be able to make such a contribution.

I am not really in favour of people withdrawing all their money from their super fund at age 60. Super's tax-free status makes it the optimum environment for retirement savings and, once the money is withdrawn, you might have problems recontributing it, given the caps that exist below and above age 65.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW 2026. Helplines: Banking Ombudsman, 1300 780 808 pensions, 13 23 00.