Multiple pensions and the CSHC

Summary: Questions and answers around multiple pensions, super contributions and the Commonwealth Seniors Health Card.

Key take-out: When a new account-based pension is commenced after January 1, 2015 only its value will be subject to the new deeming rules for the income test.

To start off my column for this week I need to amend an answer I gave recently relating to what documentation must be completed for an SMSF claiming CGT relief as a result of the transfer balance caps.

In addition to the questions in item 11 of the annual return, a CGT schedule must also be lodged. The only item on that schedule that needs to be completed was the last question shown at item 8 titled, ‘other CG information required (if applicable)'.

The last question asks, ‘Have you chosen to apply the transitional GST relief for superannuation funds?' The 'yes' box should have a cross put in it. I had been confused by information also requested at item 8 that required an amount for a notional capital gain amount deferred.

Where a super fund has used the segregation method, and therefore is not paying any tax on the CGT relief claimed, no income tax is payable, and an amount does need to be entered. Income tax is only payable by non-segregated funds that have obtained an actuarial certificate on a portion of the CGT relief claimed.

If an SMSF annual return has already been lodged for the 2017 year, without the required CGT relief sections completed, an amended annual return and a CGT schedule can be lodged showing the correct information. This should be done if possible before June 30, 2018.

Question: Can you please clarify a situation where a person has multiple pensions from their SMSF that were started before 2015 and have been grandfathered for Commonwealth Seniors Health Card income test purposes. What happens if an additional allocated pension is started, without cancelling the existing pensions? Does only this new pension have to be deemed to comply with the income test, or will all the existing pensions now have to be deemed?

Answer: Where a person or couple were eligible for a CSHC at January 1, 2015, and were receiving account-based pensions that previously were not counted, they retained the CSHC despite the income test changing on that date. As long as the pre-existing account-based pensions are retained and not commuted their value will not be counted under the new deeming rules that apply to account-based pensions.

When a new account-based pension is commenced after January 1, 2015 only its value will be subject to the new deeming rules for the income test.

Question: We have $200,000 in an SMSF and $850,000 outside of super. We are self-employed and still working. One aged 58 before July 1, and the other aged 60 in August. What is the maximum we can contribute to the SMSF to attract the lowest tax rate this financial year? Also, I would like to know more about the bring forward policy, that is how much, by what date and what would be the benefits (or otherwise) of doing so?

Answer: The maximum deductible personal super contribution that can be made for the 2018 year is $25,000. This means you can both make a tax-deductible super contribution of $25,000, each as long as the relevant documentation is completed, and the funds are received by your SMSF no later than June 30, 2018.

You should be careful to make sure that your net income after deducting the personal superannuation contribution does not fall below approximately $20,000. This is because, after taking account of the low-income tax offset, no tax is payable below this amount. If your taxable income dropped below $20,000 you would be paying the 15 per cent superannuation contributions tax and not reducing your personal income tax.

I am not sure why you have $850,000 outside of super given your ages. If this money is meant to be used for retirement purposes it would make sense to commence making non-concessional super contributions.

By keeping $850,000 in your personal names you earn income that is taxed at your marginal rates of tax. The lowest rate including Medicare Levy you pay is 21 per cent. Using the bring forward rule you could each contribute $300,000 before June 30, 2018. This would result in any income earned within the SMSF being taxed at no more than 15 per cent.

Question: I am thinking of changing super funds and want to know if I will be eligible to receive impending distributions and franking credits from the fund which I am departing, or will my existing fund transfer the distributions to my new fund after money from my old account has been transferred to the new one?

Answer: Not knowing exactly what super fund you are currently in, I can only assume the methodologies that would be applied by your current fund in relation to your rollover request.

Once the existing fund has set a date for your rollover it will assess the value of your superannuation account at that time, allowing for any income received – possibly a portion of income that you will be entitled to but have not yet received, and any tax or other costs that will reduce the value of your superannuation account.

Once your account balance has been established and converted to cash it will be transferred to your new super fund. I do not believe your existing super fund would be making further transfers after distributions have been received after this date.

If your current superannuation account is with a wrap platform, as a part of the rollover process any investments that apply to your account must be sold and converted to cash. You will need to ask your super fund administrator if it is through a wrap platform as to how they will treat distributions that have been announced but not yet received.

Question: Max Newnham advised that "To be eligible for the Commonwealth Seniors Health Card you can have over $2.6 million in financial assets and still be eligible." My understanding is that as a home owning couple, you cannot have more than about $800,000 in asset. Can you please confirm and clarify?

Answer: You are unfortunately getting confused between the assets tests that apply to the Age Pension, and the amount of investment assets that someone can have and still qualify for the CSHC.

Under the assets test for the Age Pension, a home-owning couple with assets of less than $380,500 receives the full pension. Once a couple's assets exceed this lower limit the fortnightly pension decreases by $3 for every $1000 over this lower limit. The eligibility for the Age Pension ceases altogether once a couple have assets of more than $837,000.

Eligibility for the CSHC is based purely on the adjusted taxable income of a couple. A couple can earn up to $86,076 in adjusted taxable income and receive the CSHC. Adjusted taxable income is calculated by adding to a couple's combined taxable income such things as investment and property losses, tax-exempt foreign income, certain tax-free pensions or benefits, and the deemed income earned on exempt account-based pension balances.

A couple with no other investment assets other than account-based pensions, on the basis of the deeming rates that apply, can have just under $2.67 million in these accounts and qualify for the CSHC.

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