Owning companies and getting a pension

Summary: The differences between owning a company and being a sole trader, and why one will work against getting a higher pension.

Key take-out: When it comes to income in retirement, individuals need to do their sums before unwinding a company structure.

Question: I am 75-years-old and have been single-handedly running a successful small consulting company for 20 or so years in preparation for slowing down and the pension. I have been informed that I will have to close the business, although I can evidently run the business as a sole trader.

I now only draw about $20,000 per annum in salary and it will progressively decrease over the next few years, hopefully I can still service a couple of long-term local clients for another 5 years. Do I have to close the company altogether before I can claim the pension, and if so can I keep the trading name?

Answer: I am not sure who told you that you need to close the company to apply for the age pension, because in fact this is not the case and you would be disadvantaged if you operated as a sole trader. Keeping the company going would add a slight degree of complexity to your situation, but that would be outweighed by the benefits of receiving a salary, rather than the net profit you would receive as a sole trader.

The first thing to understand is that there are two tests that determine how much of an age pension you will be eligible for. These are the assets test and the pension test. Whichever of these tests results in the least age pension receivable is the test that will apply.

Under the income test a single person can earn up to $168 a fortnight, while a couple can earn up to $300 a fortnight and still receive the full age pension. For every dollar that a person or couple's income exceeds these thresholds the age pension decreases by 50 cents.

Income counted includes business income, salaries and wages, and deemed income on investments and superannuation. To encourage Australians to work longer there is a discount applied to salaries and wages income earned by someone eligible for the age pension.

The discount is called a work bonus and results in a person being able to earn up to $250 per fortnight, and up to a maximum of $6500, which is not counted under the income test. This means if you wound up the company and earned $20,000 as business income all of it would be counted under the income test.

If you instead kept the company going, received a salary of $20,000, only $13,500 of the income received would be counted under the income test. This means by keeping the company going you would be eligible for $3250 more in age pension than if you wound up the company and operated as a sole trader.

Question: Could you please advise if the deferred tax liability should be added back to the SMSF member's account balance for the purpose of determining the value of their total superannuation balance (TSB) as at 30 June 2017? The fund is still in accumulation phase for all members. I ask as adding the deferred tax liability could impact our ability to access the bring forward rule for non-concessional contributions.

Answer: The deferred tax liability shown in the accounts of your SMSF has resulted from the accountant or administrator of your fund adopting tax effect accounting, which recognises that the fund will have a potential tax liability or potential tax benefit based on the increase in the value of its investments.

These entries affect a member's balance with regard to the accounting profit but are adjusted when preparing the income tax return for the fund. For example, super funds show what the unrealised gain or loss on investments are. However, when the tax payable or refundable is calculated for the fund unrealised gains are deducted from the income and unrealised losses are added back, to arrive at the taxable net income of the fund.

You do not need to do anything in relation to the deferred tax liability. The only affect of using tax effect accounting, depending on the value of unrealised gains and losses, is that the TSB will increase and decrease as a result of the unrealised gains and losses. You are right that if a member's TSB increases due to tax effect accounting and recognising unrealised gains and losses, a member's account balance could increase to more than $1.4 million. This would affect how much of the bring forward rule that member can use.

Question: I have recently sold a building that I worked out of for over 15 years and have retired. I am using the 15-year small business CGT exception. Is it possible to put any of this money into our SMSF as we have both reached the 1.6 million mark?

Answer: There are effectively four different types of non-concessional contributions that a member can make. They are:

1. Ordinary non-concessional contributions,
2. Eligible personal injury payment contributions as a result of a structured settlement,
3. Downsizing super contributions, and
4. Small business capital gains tax concessional contributions.

The restriction on being unable to make non-concessional contributions once a person's TSB exceeds $1.6 million only applies to ordinary non-concessional contributions.

To be eligible for the 15-year small business CGT exemption the person must be age 55 or older and retiring or be permanently incapacitated. The maximum benefit that can be claimed under the 15 year exemption is subject to a lifetime limit that increases each year. For the 201/617 year the limit was $1,415,000.

Question: We are 50, and have lived in our home for 15 years, and want to downsize now. If we move out leaving the young adult kids in the house, and were to sell in another 15 years, would that satisfy the downsizing requirements?

Answer: For someone to be eligible to make a downsizing superannuation contribution they must be:

• 65 or older,
• the amount contributed must come from the proceeds of selling the home after July 1, 2018,
• the home must have been owned for 10 years or more prior to the sale,
• the home sold is not a caravan, houseboat or other mobile home,
• the proceeds from the sale of the home must be eligible for the CGT main residence exemption,
• the relevant documentation is provided to a superannuation fund,
• the downsizer super contribution is made within 90 days of receiving the proceeds of the sale, and
• you have not previously made a downsizer super contribution.

If you purchased a new home as a part of your downsizing strategy you would not be eligible for the main residence exemption, as this new home would become your main residence. The only way you could downsize and keep your existing home would be to rent the new home you shifted to.

Given that if you downsize now by selling your current home, and you will not be 65 for another 15 years, it does not make any sense holding onto your current home and renting a smaller property. It would be better to sell your current home, purchase the smaller property, and if you are eligible contribute any excess as a non-concessional contribution now. Before taking any action, you should seek professional advice.