Downsizing, a steady income stream & more

Q. My wife and I are both 60 years old; my wife runs her own business and I am in full-time employment. The balance of our SMSF is $700,000, roughly the same as our mortgage.

The option to reduce the mortgage is being considered out of several options for how to create a comfortable retirement with low expenses and steady income from property rentals.

What are the conditions to be fulfilled so we can make a withdrawal from our SMSF to reduce our mortgage and is there a limit for how much I take out?

A. As you are both 60 you have two options to meet a condition of release so you can take a lump sum payment from your superannuation. The first is the retirement condition, which requires someone to cease working and not intend to work for more than 10 hours a week. As you are still working full-time, unless you want to retire now, this condition of release would not be an option for you.

The second condition of release as you are 60 or older is to cease employment with one employer. If your wife operates her business through a business entity, such as a family trust or a company, and is currently receiving a salary from that business she could cease her employment and then receive her income in the form of dividends or trust distributions.

You could meet this condition of release by working for another employer, even if it is only for a week, and then resign from that position. Once a condition of release has been met there is no maximum limit set on what you can withdraw as either a pension or a lump sum payment.

From your question, it appears that you have some rental properties and intend on generating an income from these in retirement. You should seek advice from someone who specialises in strategic tax planning as I believe you will be better off not taking a lump sum out of your super now to pay off the mortgage, and instead have a plan to maximise your super and reduce the tax payable on selling the rental properties after you have retired to pay off your mortgage.

Q. I was aware that the downsizing contribution can still be made when you have exceeded your super balance cap of $1.6 million, but was not aware that this contribution is treated as a tax-free super benefit. 

I have reached the $1.6 million cap, with a couple of small pensions being tax-free, and one having a mixture of tax-free and taxable component. I also have a separate accumulation account with a mix of taxable and tax-free components.

We are considering selling our home, which is now far too big for us, sometime in the next couple of years, to downsize into a smaller home, and contribute $300,000 each into our super as downsizing contributions.

Given my circumstances as outlined above, am I able to withdraw $300,000 from my mixed partly taxable pension account, then make the downsizing contribution of $300,000 and lock it in as a tax-free pension?  

My super is in two separate SMSFs, with the pensions in one and the accumulation account in another, so I would not mix the newly contributed $300,000 with the existing partly taxable accumulation account if I withdraw the partly taxable pension first, take the money out, and then put the new money in and commence a new pension with it straight away.

A. What it would appear you are trying to do is to increase the tax-free component of your superannuation. The strategy you have outlined should work as long as you can meet all of the downsizing super contribution rules.

Those rules include the following:

1. you must be over 65,
2. you must have lived in your house for at least 10 years,
3. the amount of the contribution is limited to the proceeds from the sale of a property or $300,000 per individual whichever is the lesser,
4. the contribution must be made within 90 days of the proceeds from the sale of the house being received.

The sequence of events that would need to take place, after you have worked out where you want to move to and have put your house on the market, would be to:

1. commute your account based pension that is a mixture of tax-free and taxable super benefits,
2. use the funds produced from the computation of your pension to assist with the purchase of your new home,
3. contribute $300,000 into your SMSF that has the pension accounts in it now and then commence a new account based pension from that contribution immediately.

Q. My super is made up of approximately 60 per cent in tax-free super and 40 per cent in taxable super that is all in accumulation mode. I have a separate reversionary pension in place, which will go to my wife.

When I die, half of the accumulation account total will go to my wife, and 50 per cent to others who are not dependants. Is my Executor able to pay the bequests to the others fully out of the tax-free component, leaving my wife to be paid the taxable component plus the final 10 per cent of the tax-free component, which should all be tax-free in her hands, as she is a dependant? Or will all bequests have to be paid with a 60/40 tax-free/taxable proportion?

A. Unfortunately, when payments are made from a member’s superannuation account a choice cannot be made to pay tax-free super benefits as one payment and taxable benefits as another. Instead, as you have stated, the payments must be made with the original tax-free and taxable components remaining the same.

Q. I am 63 and have $1 million in super in pension phase, receiving $7500 per month from two separate funds. Currently, I have 50 per cent of my superannuation in Q SUPER, a government-run super, and 50 per cent in an SMSF. Can I take money from my Q SUPER account and roll it over to my SMSF without penalty or having to pay tax?

A. There is nothing within the superannuation or income tax rules that will stop you rolling over from your Q Super account into your SMSF. The only time the tax would be payable on the rollover of superannuation is if there are unrealised investment gains in the underlying investments of the superannuation pension account, and the super fund rules require the rollover to occur from an accumulation account to another accumulation account.

If the investments are sold after having been rolled back to an accumulation account tax would be payable on any gains made. In this situation, the investments should be sold while still in pension phase and then rolled back to an accumulation account. You will need to check with Q Super to see if they will allow you to roll over from the pension account with them into a pension account in your SMSF.

Q. I am trying to maximise my wife’s super through co-contributions, LISC and any other methods available, her income is under $37,000. What is the best way to do this?

A. The Low Income Super Contribution was a government initiative that was repealed on July 1, 2017, and was replaced by a Low Income Super Tax Offset. The LISTO is a tax offset that is paid to the super fund, for someone who earns less than $37,000 a year, to effectively reduce the income tax payable on concessional contributions by 15 per cent.

If you are wanting to maximise your wife’s super you should consider splitting your concessional contributions with your spouse. This can be done if your spouse is under 65, has not retired, and the rules of the superannuation fund your contributions are made to allow it. You could split up to 85 per cent of your concessional contributions made in a financial year.

Another way of increasing your wife’s super would be to make non-concessional super contributions on her behalf up to the maximum limits. By making non-concessional contributions your wife should also be eligible for the $500 super co-contribution.

If you have a question for Max Newnham please email it directly to max@taxbiz.com.au.