Salary sacrificing, pensions and unlisted property

Summary: A reversionary pension means there is no interruption to the income stream upon the death of a member.

Key take-out: A benefit could be achieved under current market conditions if an account-based pension was not reversionary.

Question: Regarding salary sacrifice, at what level of income does salary sacrifice become worthwhile?

Following on from that question, if a person earns less than that figure, would they be better off making an after-tax contribution of $1000 and receive the Government co-contribution as well? Are there any restrictions to the second suggestion?

Answer: Sacrificing salary as extra super contributions, or making personal tax-deductible contributions is only worthwhile as long as a person’s taxable income is not taken below the level at which no tax is paid. For someone under 65 that is approximately $20,000, for someone that is 65 or older that level varies from approximately $25,000-$27,000.

It does not make sense making tax-deductible contributions that do not result in a reduction in tax for a member. This is because the super fund will pay tax at 15 per cent on the contribution while the member is getting no benefit. In this situation it makes more sense to make a non-concessional contribution.

There are no restrictions except for those that relate to the various contribution limits.

Question: Could you please explain what a reversionary pension is? How does a person with a SMSF establish one? What are the advantages/disadvantages of one? Where it may be appropriate to establish one? Any other aspects you may think applicable?

Answer: A reversionary pension is a superannuation income stream that reverts or automatically passes to a dependent. This means reversionary pensions can only be used where the pension will pass to a spouse or a dependent child that meets the requirements of being a superannuation ATO tax dependent.

Reversionary pensions are either established at the time that they are started as an account-based pension, or an existing account-based pension can be converted to a reversionary pension by the trustees drawing up documentation that states upon the death of the member their account-based pension will pass to their named dependent.

The benefit of having a reversionary pension are that there is no interruption to the income stream upon the death of a member for their surviving dependent. In addition, there is more certainty created as to the value of the account-based pension, because it is the value at the date of the member’s death.

If an account-based pension is not a reversionary pension, and it is decided to pay a death benefit pension to the surviving dependent, the value of that death benefit pension is the value of the underlying assets at the date that the death benefit pension commences.

If the value of the underlying investments supporting the death benefit pension have increased since the date of the member’s death, a higher value will be counted for the $1.6 million Pension Transfer Balance Cap (PTBC).

With the current major falls in both Australian and overseas share markets, a benefit could be achieved if an account-based pension was not made reversionary. This would be because the value of the underlying investments have decreased from what their value was at the date of the death of the member, and therefore the amount counted for the PTBC is less than what the value would have been had it been a reversionary pension.

So effectively if the trustees and members of an SMSF want to gamble on being able to pick a time when the underlying value of investments supporting a deceased member’s pension decreases, having or converting an account-based pension to a reversionary pension would not be advisable.

Apart from this ability to possibly reduce the value counted under the PTBC, I can see no disadvantages of having an account-based pension being reversionary. Another benefit from making an account-based pension reversionary is that there is no need to draw up a binding death benefit nomination. It therefore makes sense when commencing an account-based pension, and there is a dependent, to be made reversionary at that time.

Question: My wife and I are both 61, we are retired and have account-based pensions in our SMSF, with the total value being split 50/50 between us. In the event that I died she is my beneficiary and vice a versa. We were wondering what planning could we do that, in the event that we both died, how could we minimise the death tax payable from our super accounts by our non-dependent children?

Answer: From your question it would appear that the majority of your account-based pensions are made up of taxable benefits. The death tax you are referring to is the 17 per cent income tax and Medicare levy that is paid by non-dependent children that effectively inherit their parent’s superannuation.

There is a tax planning superannuation strategy that you could use that increases the percentage that a member has in tax-free superannuation benefits. Tax-free superannuation benefits result from non-concessional after-tax contributions, from small business capital gains tax retirement contributions, and from downsizing contributions.

With you both being 61 now, and if the total value of your total superannuation balance and pension transfer account balance is below $1.6 million, you have the ability to increase the value of your tax-free superannuation in your SMSF by up to $600,000.

This would be done by over the next three years each commuting $100,000 of your account-based pensions as a lump sum payment, then making a non-concessional contribution of $100,000, and then commencing an account-based pension from that contribution immediately. In your 65th year, prior to turning 65, you would commute a further $300,000, make a non-concessional contribution of $300,000, and commence a pension immediately.

There are some administrative and technical aspects of this re-contribution strategy that means you should seek professional advice from someone who specialises in strategic superannuation tax planning before taking any action.

Question: Thank you for your article on InvestSMART about constructing an investment portfolio for an SMSF. My question is simple, how do you invest in unlisted direct property trusts?

Answer: You invest in unlisted direct property trusts usually through an application form that is a part of a product disclosure statement issued by the fund manager. Some unlisted direct property trusts have periodic liquidity events allowing investors to withdraw some or all of the value of their investment.

Unlisted direct property funds that offer some form of liquidity tend to have lower income rates due to the level of cash that the fund is required to hold.

The other type of unlisted direct property trust is extremely illiquid and has a set timeframe for the investment, which mainly range from five years to seven years. These funds tend to have higher income yields due to them not requiring to hold such a high balance in a cash.

The GFC to a large extent sorted out the wheat from the chaff, with some fund managers in the unlisted direct property trusts area going out of business. There are not many fund managers, and due to the majority of the funds being closed ended fixed term investments, there is not a wide variety of funds to choose from.

Fund managers that I know that operate in the unlisted direct property trusts area, but this is not an exhaustive list and advice should be sought before investing with these companies, include:

• Charter Hall
• Cromwell
• Australian Unity
• Placer Property
• SCA property group
• Centuria Capital

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