My five most common questions

Just how does superannuation work, property in a DIY fund, and franked dividend concerns jump out as the big concerns for our subscribers over the past year.

Summary: This article provides answers on when superannuation contributions can be made, how much can be contributed, the benefits of maximising tax-free contributions, having residential property within a SMSF, and the treatment of dividends and franking credits during different stages of a fund.
Key take-out: The work test does not include 40 hours spent in investment activities such as share trading or looking after a rental property.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

First things first: Thanks to the hundreds of investors who took time to write to me over the last year. Keep the questions coming and I’ll be happy to provide the answers. I thought for the final column of the year it would make a lot of sense to give everyone a summary of the key themes that have crossed my desk over the course of 2013. I’m sure the questions that have come in from subscribers reflect concerns that are widely held in the community.

For many retail investors there may often be a sense of isolation when working on a portfolio. As Eureka writers have noted so often, the market is skewed heavily towards institutional investors and moreover there is a large industry in whose interests it is to keep things just as they are … that’s why we publish the Tax with Max column every Monday evening.

In extracting the five most common issues that have exercised the minds of my correspondents during the year it is no surprise to find the essential elements of superannuation are the dominant theme – it’s remarkable with almost 1 million people now in DIY funds and every worker in Australia mandated to make a superannuation contribution through the Superannuation Guarantee scheme there is still a lot of misunderstanding around the most basic elements of superannuation.

You’ll find the questions also cover property and the issue of franked dividends. No wonder these issues are also prominent now that residential property has returned to ‘normal’ returns – the national return from property over the last 12 months was 9.5% (a figure pushed higher by Sydney) but still a welcome return to previous patterns.

Similarly, the ability of franked dividends to enhance returns from investors of all ages, particularly retirees, is always a popular theme. So what were the five outstanding issues? Here goes…

No. 1: When can I make superannuation contributions?

Answer: The amount that a person has in superannuation depends on four things. The amount of superannuation contributions made, the amount of income generated from the investments of the superannuation fund, the total tax paid on contributions and income, and the amount of administration fees charged against a member’s account.

The most common form of contribution is concessional contributions made either by the member or their employer that has resulted in an income tax deduction. Due to meddling by politicians over the years the amount that can be contributed has changed many times. One thing that has not changed has been when a person can contribute to superannuation.

Where a person is under 65 years of age, they can either make contributions personally or have contributions made on their behalf up to the limits. Once a person is 65 or older there are only two ways that contributions can be made. The first is if they are employed and they earn more than $450 in a month. In this situation their employer must make a superannuation guarantee contribution on their behalf, and there is no age limit.

The second way that superannuation contributions can be made for someone who is 65 or older, but under 75, requires the member to pass a work test. Under this test a person must work 40 hours in paid work over a continuous 30-day period in the financial year the contribution is made. Paid work includes employment and also a person earning business income. It does not include 40 hours spent in investment activities such as share trading or looking after a rental property.

No. 2: How much can be contributed as superannuation contributions?

Answer: When the new superannuation system was introduced on July 1, 2007 there were two limits for concessional contributions and also two limits for non-concessional contributions. The limits for concessional contributions started out at $100,000 for people aged 50 and over and $50,000 for everyone else.

The upper limit was always meant to cease from July 1, 2012 but the lower limit was meant to increase in line with increases in Average Weekly Ordinary Times Earnings in $5,000 increments. When the GFC hit the Labor government halved both of the contribution limits. In addition they froze any increases in the lower rate due to increases in AWOTE.

One of the last actions of the Labor government was to reintroduce an increased contribution limit for people 60 and over for the 2014 financial year. Anyone over 59 on July 1, 2013 can contribute up to $35,000 in concessional contributions for the 2014 year, while everyone else has a limit of $25,000. From July 1, 2014 people aged 49 and over will also have a contribution limit of $35,000.

Currently the maximum limit on non-concessional contributions is $150,000. There is the ability for people under 65 years to use a two-year bring forward rule to contribute up to $450,000. Once a person turns 65 they have a maximum annual non-concessional contribution limit of $150,000.

No. 3: What is the benefit of maximising tax-free super through non-concessional contributions?

Answer: There are two components of superannuation. The first is taxable and the second is tax-free. Tax-free superannuation mainly results from people making non-concessional after tax contributions. Tax-free contributions can also result from small business capital gains tax retirement and 15-year concessions being contributed to a superannuation fund.

Taxable superannuation is made up of accumulated concessional super contributions and net income credited to a member’s account. While an account is in accumulation phase tax-free superannuation is expressed as a dollar value. Taxable super is equal to the value of a member’s superannuation minus the value of their tax-free superannuation.

When a pension is started by a member the value of their tax-free superannuation is calculated to represent the percentage that it makes up of their total value of superannuation. For as long as the pension is paid the percentage value for tax-free superannuation remains the same.

When a member dies any taxable superannuation that passes to non-dependant beneficiaries is taxed at 16.5%. In most cases a non-dependant beneficiary is anyone that is not a spouse or a child under 18 years of age. Tax-free superannuation has no tax paid on it when it is paid to both dependants and non-dependants.

This means unless a person is happy to enter into the spirit of Christmas, by making sure that the Australian Taxation Office is enriched upon their death instead of their family, it makes sense for a person to maximise their tax-free superannuation using various strategies.

No. 4: Can an SMSF have residential property, and is it worth borrowing the maximum amount?

Answer: An SMSF can buy residential property for investment purposes as long as it is not purchased from a member or related party. The only property that can be purchased by an SMSF from members is business real property. Having residential property, depending on the total value of an SMSF’s investments, can make sense while the fund is in accumulation phase.

From an income tax point of view it does not make a lot of sense to maximise the borrowing within an SMSF. This is because members will more than likely be paying a higher income tax rate than the super fund. For example, the tax benefit for every $1,000 of rental losses within a superannuation fund is $150, while the lowest tax benefit for an individual is $205, with the maximum benefit being $465.

Having direct property as an investment within an SMSF makes sense when the members are in accumulation phase, but it can actually cause problems when the members commence a pension. This is because, in most cases, residential property is lucky to produce a 3% net income return while the minimum pension that must be taken by a member is at least 4%. (To read more on acquiring property through a DIY fund or SMSF read Bruce Brammall’s article today Is property best inside a SMSF?)

No. 5: How are dividends and franking credits treated during the different stages of an SMSF?

Answer: It makes sense for an SMSF to invest in Australian listed shares from both an income tax and investment point of view. One of the best ways to reduce risk in any investment portfolio is to diversify the investments held across the different asset classes, and then diversify within each investment class. Listed Australian shares, whether the shares are held directly or through managed funds, provide diversification.

Fully franked dividends received from Australian shares bring a 30% franking credit that will either reduce income tax payable by the fund in accumulation phase, or result in a tax refund when an account is in pension phase. For example, a superannuation fund in accumulation phase that received $1,400 in fully franked dividends receives a franking credit of $600. After allowing for the 15% tax payable on this income, an excess franking credit of $300 can be used to decrease the tax payable on contributions and other income earned by the fund.

When a superannuation fund is in pension phase the whole of the franking credit is received as a tax refund, thus increasing the effective return on the share investment. When a super fund has members in both accumulation and pension phase the franking credits are still available to the super fund and apportioned between the members’ accounts.

That’s it for 2013 … I’m ready for 2014, so please send in your questions.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles