Non-concessional contributions and defined benefit super

Summary: Defined benefit non-concessional contributions; small business CGT concessions; and SMSF rollovers.

Key take-out: Whether income tax is payable on super rollovers is contingent on circumstances surrounding the rollover, as assets in a pension account often need to be liquidated for the rollover to occur.

Question: I am in a Defined Benefit Superannuation Scheme and want to know how the non-concessional contribution caps affect me, as the contributions are based on the health of the fund.

Answer: You will be affected by the non-concessional contribution caps just the same as members in traditional accumulation super funds. However, because you are in a Defined Benefit Super Scheme (DBSS), the value of your superannuation account each year needs to be calculated by your fund’s actuaries.

You should receive an annual statement each year advising you of the accumulated value of your defined benefit account. This value is provided to the ATO by your fund to update your Total Superannuation Balance (TSB) as at June 30 each year.

The annual non-concessional contribution limit of $100,000 per annum applies to you, as does the ability to access the two-year bring-forward rule to make a non-concessional contribution of up to $300,000. The actual amount that can be contributed under the bring-forward rule will depend on your TSB.

If your TSB is under $1.4 million, you can contribute up to $300,000; if your TSB is greater than $1.4 million, but below $1.5 million, you can contribute up to $200,000; and if your TSB is above $1.5 million but less than $1.6 million, you are limited to contributing $100,000.

If you are considering making a non-concessional super contribution, and you are unsure of your TSB, you should contact your super fund and ask them of the amount you will be able to contribute, according to what they have advised the ATO.

Question: I am a self-funded retiree aged 67 and just read your article in Investsmart on franking credits and offsetting personal tax, and the second question in the article prompted me to write to you about CGT.  

In 2006, my wife and I bought a small farm of 16 hectares in joint ownership for around $500,000 and are looking to sell it for $750,000 today. My wife is registered as a sole trader, and is 66 years old. We have run a fruit production business continuously since buying the property.  

My wife will, I believe, meet the requirements for full CGT exemption with turnover less than $2 million per year by having around $100,000 per year, active management of the asset in the business, and passing the 50 per cent level of less than 15 year ownership rule.  She also would qualify for CGT exemption on the retirement basis.

Since the property title is in joint names, and I nominally have no part in running the business, will my share of the gain on the sale of the property, which would be on 13ha of land as the property is our Principal Primary Residence and therefore 2ha would be CGT free, be subject to CGT assessment?

Answer: The rules relating to the small business CGT concessions are reasonably complicated, but also quite generous – as they can apply to more than just the person or entity carrying on a business. For example, the CGT concessions for active assets apply to those assets owned by other people, and entities that are different from the people or entity carrying on a small business.

This is because the CGT concessions apply to passively held assets. This refers to assets producing rent, as opposed to being used to run a business; as long as the asset is used or held ready for use by – or is inherently connected with – a business carried on by an affiliate of the owner, or an entity connected to the owner.

For example, take the case of a dentist operating his or her business through a company structure, but with a family trust owning the surgery used by the business which is leased to the operating company. In this case, the CGT active asset concessions apply to the family trust. There are, however, some extra tests which must be passed to enable access to the CGT concessions.

You will be able to access the CGT concessions in your situation because you are regarded as an affiliate of your wife, based on your joint ownership of the land, and the fact the land is used by your wife to carry on her business.

Due to the complexities related to the small business CGT concessions – and if you want to maximise the amount that can be contributed to superannuation for both of you – you should seek professional advice before taking any action.

Question: I am 64 years of age and in retirement receiving a pension from two superannuation funds. Currently I have 50 per cent of my superannuation in Q SUPER, a government run super, and 50 per cent in an SMSF. Can I take money from my Q SUPER account and roll it over to my SMSF without penalty or having to pay tax?

Answer: When superannuation is rolled over from one fund to another, there is no income tax paid on the value rolled over. However, income tax could be paid by the fund depending on how the rollover is actioned. Although there is no income tax paid on the amount rolled over, there could be penalties or charges imposed by a super fund depending on its rules.

The reason why income tax could be payable on the rollover to another fund is because the assets supporting the pension account in most circumstances need to be converted to cash. The only case I have seen in which an asset does not have to be sold and converted to cash is when there is an in-specie rollover of an asset from one SMSF to another.

When an asset is sold by a super fund – or transferred in-specie – a capital gains tax event occurs. As long as the asset is sold or transferred while the account is still in pension phase, no income tax is payable. If a pension account must be converted to an accumulation account for the rollover to occur, and the sale of the assets occurs while the account is in accumulation phase; income tax would be payable on any capital gain made at that time.

As for whether you will be able to roll over your pension account to your SMSF, you will need to check with Q SUPER to find out whether this is possible.

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