Inheritances and bringing back slight excesses

Question. What are the conditions of release under superannuation law? Can somebody aged 59 take a lump of $20,000 out of their super fund?

Answer. For someone aged under 60 to access their superannuation either as a lump sum or as an account-based pension they must meet the retirement condition of release. To meet this condition of release a person must not work for more than 10 hours a week. For someone who is 60 or older, but not yet 65, an additional condition of release is ceasing employment.

Question. My partner and I are both 65, have no debts, own our home, and have around $540,000 in our SMSF. We draw a pension from the fund and also receive a part government age pension. My partner will be receiving an inheritance of around $600,000 later this year but probably not before the end of June. We realise we will lose the part age pension but what is the best strategy for us in regard to combining this money into our fund?

Answer. As you are both 65, if you cannot pass the work test before June 30, 2017, you have very few options regarding the $600,000 inheritance that you will be receiving. If you have passed the work test for the 2017 financial year by working at least 40 hours in a 30-day period, you could borrow $600,000 and make a non-concessional contribution before June 30.

If you cannot pass the work test for the 2017 year, but could pass the test in later years, you could contribute $100,000 each as non-concessional contributions in the years that you pass the test.

Another option would be to not have the money from the inheritance go into your super fund and invest it personally. Taking into account the low-income tax offset and the seniors tax offset, you could each earn approximately $27,000 and not pay any income tax.

This would mean, if your only other income was the tax-free superannuation pension from your SMSF, you could invest the $600,000 and get a 9 per cent income return and not pay any income tax.

You should seek professional advice from a fee for service advisor that specialises in retirement and tax planning before taking any action.

Question. My wife and I exceed the new cap in our super fund that is in pension mode. What is the process to segregate our balances to pension and accumulation? Is there a form to complete for the ATO? Do we need separate bank accounts for each of pension and accumulation funds? Must we list the individual assets attributable to each fund?

Answer. When a superannuation fund only has members in pension phase it is regarded automatically as using the segregation method. This means there is nothing that you need to do with regard to the 2017 year as far as setting up separate bank accounts and listing assets.

When a superannuation fund has members in pension and accumulation phase, until now they have had the choice of either using the segregation method or the proportional method. For funds with members that exceed the $1.6 million pension, from July 1, 2017 they can only use the proportional method.

Your steps in dealing with the excess will be to roll back this amount into an accumulation account. As the fund will be regarded as using the segregation method you will be able to claim the capital gains tax concession for assets being transferred to the accumulation account. The accountant for your SMSF should be able to assist you with this.

Question. My existing SMSF balance is $1.9 million. If I commute $300,000 to an accumulation account, can I specify this as all fixed interest and then would there be any reason to reset the other assets? Also, is there an age restriction on commutation?

Answer. As it would appear you are currently receiving an account-based pension from your SMSF, you will have met a condition of release previously. You can specify that the assets transferred to the accumulation account are the fixed interest investments.

But by leaving those funds in your SMSF, almost 16 per cent of your fund will be in accumulation phase. This means despite having allocated the fixed interest investments to the accumulation account, 16 per cent of any income or capital gains made will be taxable going forward.

Once a person has met a condition of release, such as turning 65 or retirement, there is no age restriction on when they can commute all or part of an account-based pension.

Question. I'm turning 65 later this year and will be retiring in July. I have a residential property in my super fund worth approximately $1.2 million and $600,000 in cash and shares, which will take me over the $1.6 million pension cap. I'm unsure whether I need to divest $200,000 to bring me in line with the new cap?

Answer. You have a number of options open to you with regard to dealing with this excess that you have in your pension account. The first is commuting $200,000, rolling this back into accumulation, and using the segregation method allocating shares with large unrealised capital gains to the accumulation account. Then you could claim the capital gains tax concession.

Your second option is commuting $1.2 million of your pension account and using the segregation method to allocate the residential property to the accumulation account. Then you could claim the capital gains tax concession on any unrealised gain that the property has built up.

Under the second option you would then commence a new pension from $1 million in the accumulation account after June 30, 2017. Before taking any action you should seek professional advice to make sure which of the options available to you produce the best result.

Question. I have an account-based pension and have exceeded the Government's transfer balance cap of $1.6 million. Obviously, I need to roll back any excess funds above the limit back into an accumulation account before July 1. But how do I determine how much is in the pension account on any given day?

The current standard industry practice is to prepare the rollback document after the annual return which is generally May of the following year. What instructions do I give my accountant? Can you shed some light on how, and when, the excess contribution is going to be rolled back?

Answer. Your accountant for the SMSF is hopefully being proactive with regard to clients that will exceed the $1.6 million pension transfer balance cap. This should mean that you will not need to do or say anything as the accountant for the SMSF should be preparing the documentation to facilitate the efficient commutation and roll back to accumulation.

In simple terms, the documentation should include a letter from you as the member requesting the trustee of the fund, once the 2017 financial and member's statements have been finalised, to commute any excess over the $1.6 million limit and roll this back into an accumulation account prior to finalising the June 30, 2017 accounts.