Franking changes, contributions tax and turning 65

Summary: The tax impacts of a franking rules change, tax in pension mode, and using the bring forward rule at 65.

Key take-out: If tax payable on income earned on the accumulation portion of a SMSF is less than the franking credits, the fund would not receive a refund.

Question: Could you clarify how Labor's proposed denial of franking credit tax refunds would work in my situation? I know there is no legislation, and hopefully it will never be seen, but from your understanding of the proposal, assuming an SMSF has a $2 million fund balance at time of the pension being turned on, does that mean that:

• as only 20 per cent of the total fund is in accumulation mode, that only 20 per cent of the total imputation credits can offset tax payable on the accumulation balance with any excess franking credits being forfeited, or
• will the total franking credits be able to be offset against the tax payable on the accumulation balance with any excess franking credits being forfeited?

I had assumed it was the first, less favourable scenario, but I have recently read a general article on the Labor proposal that implied that the total franking credits would be available but they did not use any numeric examples to demonstrate the impact.

Answer: You were right when you worked out that the total franking credits would be available to offset any tax payable on the accumulation balance. What will happen however, if the Labor Party does not change its policy, is that if the tax payable on income earned on the accumulation portion of your fund is less than the franking credits your SMSF would not receive a refund.

For example, if the total taxable income of your SMSF was $100,000, in rough terms this would mean that tax at 15 per cent of $20,000 would be payable. If the franking credits generated by your SMSF's share investments was $2,500, your SMSF would have tax payable of $500.

If instead your SMSF had $5,000 in franking credits, there would be no tax payable by the fund but it would lose the benefit of the excess $2,000 in franking credits.

Question: Once a superannuation fund has gone into pension phase, does the fund still pay full contributions tax at 15 per cent on all of the non-concessional contributions received irrespective of whether the superannuation fund balance is above or below the $1.6 million tax-free cap.

Answer: Contributions to a superannuation fund cannot be added to a pension account, but must instead be credited to an accumulation account. Where concessional contributions have been made, those where either an employer or the member has received a tax deduction for the contribution, tax is payable by the fund at 15 per cent of the concessional contribution amount.

Non-concessional contributions are made from after-tax funds and no tax is payable by the super fund on these contributions.

Question: In a recent response to a question the following extract of the answer stated: “In the tax year in which someone turns 65, a person can make personal tax-deductible contributions and non-concessional after-tax contributions up to the relevant limits. If the contributions are made before the age of 65, no tests apply other than the applicable limits. However, if the contribution is made after turning 65, the work test comes into effect”.

In the financial year in which I turn 65, adding that I turn 65 in December, can I use the bring forward rule with respect to non-concessional contributions, i.e. make a $300,000 contribution before I turn 65 assuming I retired when I was 63? This would mean that $200,000 of non-concessional contributions for the next two forward years would relate to financial years where I would not be working and I would be over 65 years of age, but I would have made the $300,000 non-concessional payment prior to my turning 65?

Answer: As you are retired, and would therefore more than likely not pass the 40 hour work test, you must make your non-concessional contribution prior to turning 65 in December. Depending on the total value of your superannuation you would be able to make a non-concessional contribution of up $300,000 before turning 65.

You would only be able to make a $300,000 non-concessional contribution, using the bring forward rule, as long as your total superannuation balance at June 30, 2018 was less than $1.4 million.

If your total superannuation balance was between $1.4 million and $1.5 million the maximum non-concessional contribution you could make is $200,000. If your total superannuation balance was more than $1.5 million but less than $1.6 million would only be able to make a $100,000 non-concessional contribution.

Question: I am over 70, and had super for over 25 years with MLC via NAB, and was wondering what to do. I need to know if the present laws in super have a CGT cost if I roll or switch from an accumulation fund to a pension fund? Also, what other costs could I expect? I know there is no exit fee, and during this period I did move to different funds within MLC. I did not notice any different balances from one to another; that is, the exit statement and entry statement show the same balances.

Answer: Because the investments in your MLC super account are owned by the trustee of that fund they would need to be converted to cash to facilitate the rollover to a new superannuation fund.

The investments should be converted to cash while you are still in pension phase, because there will be no income tax payable on any capital gains made. If you commuted your pension back to accumulation and then sold the investments capital gains tax would be payable on any gains made.

Once your pension account is made up of cash you would then commute this back to an accumulation account, and then roll your superannuation to another fund.

You would need to contact MLC to see whether there are any costs charged by them as a part of closing your account. You should seek professional advice before taking any action from a fee-for-service adviser to ensure that no tax will be payable as a part of you changing super funds.

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