Maximising tax-free super components

There are not many silver linings when the value of investments fall. There is one thing the trustees of an SMSF can do where their fund has tax-free benefits, the fund is still in accumulation phase, and one or all of the members can be paid a superannuation pension.

Because the value of tax-free benefits remains the same until a super fund starts paying a pension, when many investments drop dramatically in value the percentage that the tax-free benefits of the total value of the fund increases. By starting a pension when this occurs the higher percentage relating to tax-free benefits will be locked in.

Example of how to benefit from a drop in SMSF investment values

Margaret Walker who is 55, still working, and has an SMSF with a sole director/shareholder company acting as trustee. She is the only member, and over the years has built the fund up to be worth $400,000 at 30 June 2012.

She has accumulated tax-free benefits totalling $100,000. A large proportion of her investments are in mining companies listed on the stock exchange. Unfortunately due to market fears the value in the superannuation fund has decreased to $300,000.

Margaret decided to commence a TTR pension. By doing this, the percentage of her fund that is tax free is locked in at 33.33  per cent, as the following figures show.

When the value of the shares in the SMSF increases, the value of her tax-free benefits will also increase. This will mean a greater percentage of her TTR pension will be tax free while she is still under 60, and a greater percentage of the fund can be inherited by her non-dependent beneficiaries tax-free upon her death.

Documentation and Actions Required

• Letter from member requesting a pension commence payable at least at the minimum payment rate required.
• Resolution by trustee/s acknowledging receipt of request for a pension and approving it for payment.
• Letter from trustee/s to member advising that the pension will be paid and its components.
• Trustee/s complete ATO documentation to register for PAYG withholding tax.
• Trustees calculate PAYG withholding tax to be deducted and set up regular payment direct from SMSF bank account.
• If PAYG withholding tax has been deducted once a quarter trustee/s complete PAYG withholding statement paying amount withheld to ATO.

Warning

Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.