Superannuation Q&A

This week:

• Can our SMSF buy a horse?
• Super owed to a US citizen.
• Should I move my super to a term deposit?
• Which super fund should I tap?

Equine equity

My wife and I are in our mid 50s, operate our own super fund and as trustees are well aware of the sole purpose test. My wife draws a TRIP of $25,000 a year and my total annual contributions are at the limit of $100,000. I intend to maintain this level of contribution until June 2012 (and then reassess the most tax-effective options that will inevitably flow from future changes to legislation).

Whether it was good luck or the benefit of our investment strategies (we have a blend of property, fine wine, equities and managed funds) we have only seen our equities and managed funds eroded over the last year or so by about $50,000. We are both confident of the resilience of the equity market and are continuing to invest in the market.

My question relates to the ATO test on investments in that an investment should give “no pre-retirement benefit”. As trustees we intend to continue our diversification and purchase a quarter share in a racehorse. Our view is that this is a sound yet riskier investment, but that the “fun” should the horse win is fundamentally no different to the “fun” of having purchased the right equity that is taken out in a takeover and therefore the ATO should have no issue with this strategy. Could you offer a view?

There is nothing in superannuation law that specifically prohibits a DIY fund from owning a racehorse. However, the main risk associated with investing in a racehorse relates to the application of the sole-purpose test.

The sole-purpose test requires that all SMSF investments are held solely for the purpose of providing benefits to members on their retirement, death, termination of employment or ill-health. This test requires exclusivity of purpose and does not allow trustees to enjoy a direct or indirect benefit from the investment. As a result, trustees must carefully consider their ability to satisfy this test prior to proceeding with any investment.

Of immediate concern is that racehorse owners receive many ancillary benefits that are likely to be enough to fail this clause. For example, racehorse owners typically get free entry to the racecourse on race days, and there are often several tickets per owner, typically at $20 per ticket. Further, racehorse owners also receive access to the members’ section (another $30–60) plus the winning owners are often provided with food and beverage. These benefits could be seen as a breach of the sole purpose-test.

Breaching the sole-purpose test has serious consequences. First, the SMSF may lose its complying status and be subject to severe tax penalties. Second, trustees may face civil and criminal penalties, which can result in fines of up to $220,000 and up to five years’ jail.

If there is any doubt regarding compliance with the sole-purpose test, you may wish to structure the purchase outside your superannuation fund. Alternatively, you could apply to the ATO for specific advice regarding the application of the sole-purpose test in your circumstances. Both of these options will help protect your existing superannuation assets which you have worked hard to build.

In any event, it would be worth discussing your entire personal financial situation with a qualified adviser to ensure you structure this purchase as effectively as possible, and to consider how much you may be able to access from your SMSF transition to retirement pensions to assist with such a purchase. Please also be aware from July 1, the maximum amount of concessional contributions will halve to $50,000 per person if over 50. This may impact on the method you use to make your planned super saving of $100,000 per annum.

Claiming super

I am a 62 year old American with temporary residency under the 457 Business Visa. I was made redundant in April by my Australian sponsoring company. Under Immigration office direction, I had to leave Australia within 30 days of termination. I have had much difficulty communicating with the super trustee who has indicated I have no accessibility to my super. What can I do?

Temporary visa holders under the Migration Act 1958 who have permanently left Australia can claim any super they accumulated while working in Australia using the Departing Australia Superannuation Payment (DASP) system. For this purpose, “permanent” means you left Australia and can no longer enter Australia using your previous visa(s).

It does not matter how long you stayed in Australia on your temporary resident visa, or the reason you left. You may still be able to return on another visa even if you claim and receive your super money upon departure.

However, in some cases, such as if your employer contributed to an unfunded defined benefit fund, the trust deed of the superannuation fund can be more rigid than the superannuation legislation and restrict access to your super. It is extremely important you contact your superannuation fund to determine if this is the reason they believe you cannot access your super. If you are having no luck with the general contact number, a request to speak to a supervisor might help. Failing this you may need to lodge an email or fax complaint with the fund trustee.

If the trust deed of your fund does not impose restrictions above and beyond the superannuation legislation, you should request a copy of the form(s) you need to complete to claim your superannuation under the DASP system. It is also a good idea to obtain an up-to-date account balance, as the identification documents required depend on your account balance. You should also ensure you provide your fund with your overseas contact details and mailing address.

You can only access your super monies as a lump sum and this amount will be subject to withholding tax of 35% for taxable (taxed) components, 45% for taxable (untaxed) components and 0% for tax-free components.

You will only be able to apply directly to your superannuation fund for the payment of your DASP benefit within six months of your departure and cessation of your temporary visa. After six months, your superannuation account balance may be transferred to the ATO as unclaimed superannuation. Even then you will still be able to claim your superannuation from the ATO at any time, however your capacity to generate earnings is significantly restricted whilst the benefits are held by the ATO.

The ATO website is a good starting point for information.

Term deposit

I am 63 ongoing health problems have led me to seriously consider early retirement or part-time work. Being single I have been thinking of withdrawing all of my super and placing it in a term deposit account.

The reason is that I have no close financial dependants, only my brother and his family who I can’t nominate as dependants. I do know of people, including relations, that have had major problems accessing their relatives’ superannuation even though they had wills, all because they were not regarded as financial dependants.

I do realise there could be tax implications but at least if unfortunately I happen to die then the information written in my will be adhered to. I have been told that a person’s superannuation is not included in his or her will. Is that correct?

It is true that superannuation benefits are not automatically dealt with in accordance with your will. In the event of death, superannuation death benefits are paid by the trustee of your superannuation fund to either your superannuation dependants or to your estate.

For the purposes of superannuation, a dependant includes your spouse, child or any person with whom you had an “interdependency relationship”. It also includes any person who is considered to be your ordinary dependant. As you have pointed out, your brother is unlikely to be considered an ordinary dependant and therefore the trustee of your super fund will not be able to pay your superannuation benefits directly to him.

Accordingly, it is likely that the trustee of your superannuation fund will have to pay your superannuation benefits to your estate to be distributed in accordance with your will. However, for certainty, you can ensure your benefits pass to your estate without unnecessary delay by signing a binding death benefit nomination.

You should not forget to consider the taxation implications upon death of holding money within super. Depending on the tax components of your superannuation fund, superannuation death benefits paid indirectly to non-dependant beneficiaries such as your brother can incur tax of up to 31.5%, though more commonly 16.5%. Conversely, if you held the money outside of super, no tax would be payable on the transfer of cash to your brother from your estate.

While the actual level of tax will depend on what type of contributions you have made to get the money into your superannuation fund, there are strategies available to reduce this tax to nil. A number of issues must be considered prior to implementing such strategies and therefore personal advice should be sought from a financial adviser. If successfully implemented, this would allow your brother to receive the same net amount as if you moved the money to a term deposit now, but you would benefit from being able to retain the funds in the more tax-friendly environment of super until your death.

Which super to use?

My wife and I have owned a vacant block for six years and now wish to build on it to set up a rental income stream (50% availability) for up to five years (I’m 60) and retire to it when 65. Should I use cash from my GESB super fund ($250,00) or SMSF ($150,000) or borrow the full amount of $220,000?

I should roll the two supers into one but not sure if there are benefits in retaining some connection to the GESB goldstate fund ($230,000) and small Westate of $21,000. I own my home and have no debts.

By withdrawing funds from superannuation and using the proceeds to invest in a rental property (which is assumed to be held in your personal name) you will be moving assets out of the concessionally taxed superannuation environment.

Despite the changes announced in the latest federal budget, the Simpler Super legislation which came into force on July 1, 2007, continues to make super the most attractive tax structure in which to hold assets – particularly for investors who have attained their preservation age (55 for yourself).

As assets held in the superannuation 'pension phase’ incur no tax on earnings or capital gains, and drawings from super from age 60 are tax-free, investors need to carefully consider the costs and benefits of alternative structures and investments before withdrawing funds from superannuation.

In your situation withdrawing funds from GESB and your SMSF will reduce your exposure to whatever investment class you are currently invested in. If you intend to put money back into your super at some later stage (such as from the sale of your current residence) this moving between structures and asset classes could expose you to significant timing and legislative risk, as well as transaction costs. While difficult to do, you should consider the anticipated returns from your current super investments against the after-tax outcome of borrowing to build the investment property as well as what sources are available to reduce your debt at your eventual retirement. Although borrowing costs incurred for investment purposes are tax-deductible, the investment still needs to be achieving an annual increase in capital value to make the after-tax borrowing cost worthwhile.

The suitability of each strategy will depend upon a range of factors including your expected personal marginal tax rates over the five-year intended life of the investment, the stability of your cash flow, your tolerance for investment risk and your plans for your current residence. All these issues must be considered prior to taking any action to ensure you select the most suitable strategy.

In regards to consolidating your superannuation funds, you need to compare in detail insurance benefits held within each account, fees and charges, flexibility and cost to commence pensions and the availability of investment options before electing to transfer benefits from one fund to another. We strongly urge you to obtain personal advice from a qualified financial adviser to consider these aspects before acting.

Nerida Cole is the head of Dixon Advisory’s financial advisory division.

Warning: This advice is general advice only. It has been prepared without taking account of your objectives, financial situation or needs. Therefore, before acting on the advice, you should contact your adviser to discuss the appropriateness of the advice, having regard to your objectives, financial situation and needs.

Do you have a question on superannuation? Send an email to supersecrets@eurekareport.com.au.