Dear Trish: Superannuation Q&A

This week I have selected the following questions from readers.

• Do I pay capital gains tax when I switch my allocated pension to another provider?
• Are online DIY super service providers trustworthy?
• I am seriously ill and my main super strategy before June 30, 2007, is estate planning. Can you help me?

Changing allocated pension providers

If I choose to switch my allocated pension from one provider to another will I have to pay capital gains tax upon transfer?

If an individual has started an income stream in their DIY super fund and then decides to transfer to a public offer fund such as a retail or industry fund, no CGT is payable on the sale of the fund’s assets because any assets funding a retirement income stream are not subject to tax.

The same principle applies when switching between two retail providers, but watch out for any buy/sell spreads and contribution fees that may be charged by retail providers of allocated pensions.

Note: If an individual has not yet started a retirement income stream and decides to transfer the account balance to a retail or industry fund, then CGT is payable because earnings on assets in super funds are subject to 15% tax.

Capital gains on assets held for more than 12 months are subject to a CGT discount, which means a DIY fund’s effective tax rate on certain capital gains is 10%. Any capital gains on the sale of assets held for less than a year are subject to 15% tax.

Outsourcing administration

I would like to know whether online DIY super providers are trustworthy. Are there any risks involved? Who has access to investments (raising security issues, for example). Any help you can give, or websites for further info would be greatly appreciated.

That’s a big question: whether online DIY super service providers are trustworthy. In a question about trustworthiness in the financial services industry, you could easily replace online providers with financial advisers or fund managers or lawyers.

You can’t legislate to make people trustworthy. In many ways whether an organisation or individual is trustworthy is a bit of a “smell” test. The fact that you ask these types of questions is a good start.

Inexperience does not equate to dishonesty but a useful test when assessing the suitability of any DIY super adviser or service provider is how long they have been in the marketplace. If they have only set up shop in the past two years or so then be very careful unless the individuals who run the business have been in the super industry for a long time. If you are concerned, find out who owns the business and where they were before they started the online service.

There are several online service providers that provide fund establishment services, ongoing administration and compliance services and one-off transactions. Many of the providers have relationships with adviser groups and some are even owned by financial organisations. You can even get financial products with some administrators.

Some crowds will offer you a complete service with a wrap account for your investments, an administration service for your compliance requirements, an auditor, a tax agent, a financial adviser, and someone to hold your hand throughout the whole process. Think carefully before you sign on for one of these complete package arrangements.

On a $200,000 account balance, sometimes these complete service arrangements can cost you about $8000 a year, or 4% of your account balance. In many other cases, an administration service charges you a percentage of your account balance, a flat fee or an hourly fee. Your investment adviser may charge an hourly fee or charge a percentage of assets as well.

The establishment costs for a DIY super fund when using an online service provider are often fairly cheap. These honeymoon rates mean they can then offer you the higher-end services later that make them the money

Most DIY super service providers have websites that give you general information on what you need to do to set up a DIY super fund and the estimated costs involved. The costs quoted on websites generally don’t include the cost of any financial advice.

Tip: You can find a lot of DIY super-related sites by typing in 'DIY super’ into internet search engines such as Yahoo or Google and checking out the advertised links at the top or right-hand side of the web page. Look at a few sites and relevant fee schedules then chat to your shortlist about what each service offers.

Getting your affairs in order

I am 63 and a retired engineering academic. My “super” has been in accumulation phase for 10 years, with no contributions from me, and only a few draw-downs from "undeducted contributions" to cover university fees for my daughter, who lives with me and is now in the fourth year of a five-year dual-degree. Thus, I now have an account balance in a funded public sector stated super fund of:
Pre-1983 = $180,000
Post-1983 = $375,000
Undeducted = $2,600
Total = $558,000 (rounded)

Preserved = $233,000
Non-Pres = $324,500

I am concerned about the "new super rules", as announced by Treasurer Peter Costello in 2006. A significant part of my "super strategy" before June 30, 2007, will be estate planning. I have been battling cancer for three years, and I want to get my financial affairs in order. So, Trish, are you able to:
(i) offer super and estate planning advice, or;
(ii) can you recommend a financial service that can do so.

A good adviser in conjunction with a registered tax agent (and lawyer if you don’t have a will in place) can certainly assist you in removing the estate planning worry from your mind. I am not authorised to give specific advice, but we do have a database of fee-for-service advisers (you receive three from your region where possible) available to subscribers that may be of assistance. You can access this resource if you email: eurekaway@eurekareport.com.au

I can offer some general comments, however, on the super rules in relation to death benefits, tax-free super in retirement and after-tax contributions.

I assume that you are concerned about how your super benefits will be treated for tax purposes if you leave your super to your adult daughter when you die. If you plan to leave your super to adult children when you die, your death benefit may be hit with tax; that is, the taxable component of super benefits paid to adult children and/or extended family and friends when a fund member dies, will be hit with a 15% tax (plus Medicare levy).

From July 2007, if the fund member withdraws the super benefit just before they die and then gives it to his or her adult children or friends, then no tax is payable, assuming the fund member is aged 60 or over.

A dependant under the tax rules automatically includes a fund member’s heterosexual spouse and his or her children who are aged under 18. An adult child, or anyone else for that matter, can be deemed to be a dependant under the tax (and super rules) if they can prove they were financially dependent on the deceased fund member or they had an “interdependent relationship” with the deceased. An interdependent relationship is a close personal relationship between two people who live together, where one or both provides for the financial and domestic support, and care of the other.

You mention in the rest of your email that your daughter lives with you and is still studying and that you are financing her education. Considering your other circumstances, it is well worth talking to your super fund about whether your daughter is considered financially dependant or interdependent, and therefore a dependant. If your daughter is considered a dependant, then she will receive your super benefits tax-free.

If your daughter is not considered a dependant, then the next few paragraphs may be of interest.

From July 2007, Australians aged 60 or over can receive their super benefits tax-free provided they have satisfied a condition of release such as retiring or reaching the age of 65. I note that your benefit still contains a “preserved” component although, based on your details, I assume that part of your benefit will become “unpreserved” when you inform your fund that you are retired.

Before July, the existing rules relating to tax on super benefits apply to over-60s. It is possible to withdraw $135, 590 of an individual’s post-June (taxed) 1983 benefit without paying any tax over a person’s lifetime. From July 2007, this rule remains in place for individuals under the age of 60. Pre-July 1983 component is taxed concessionally (5% of amount included in assessable income) before July 2007 and tax-free from July 1, 2007.

Note: Anyone under the age of 65 can make super contributions without satisfying a work test. A popular strategy is to withdraw the post-June 1983 component up to the tax-free amount of $135,590 and then re-contribute the money as an after-tax contribution, thereby boosting the benefits that will be tax-free. An individual can also take advantage of the “bring forward” rules from July 2007 that permit an individual to make up to $450,000 in after-tax contributions every three years. For example, an individual could withdraw 100% of his or her benefit on or after July 2007, on or after the age of 60, and then make a bring-forward contribution of $450,000, creating a substantial tax-free component.

We can provide general investment advice only. If you’re seeking specific financial advice on your particular circumstances, then you’ll need to chat to a licensed financial adviser.

Do you have a question for Trish Power? Send an email to deartrish@eurekareport.com.au.