Superannuation Q&A

This week:

• Can my SMSF buy a golf club membership?
• Finances in retirement.
• Fund reserve for a member’s death.
• Living in SMSF-owned property.

Club memberships

I have been hearing reports of investors using funds in their SMSFs to buy golf club memberships. Is this legal and how does it work?

A distinguishing feature of a self-managed superannuation fund (SMSF) is the freedom of investment choice afforded to its trustees. An SMSF is allowed to hold exotic investments such as classic cars, wine and works of art provided they do not contravene superannuation rules and regulations.

Golf club memberships, however, will not typically be permitted as a type of investment within the fund. For an SMSF to remain compliant, it must satisfy the “sole purpose” test. As described in previous answers, this requires the trustees to maintain the SMSF for the sole purpose of providing retirement and/or death benefits to its members. Maintaining a golf club membership within the SMSF would contravene this test as the membership is exclusively for personal use as opposed to providing retirement benefits. The contravention may result in your SMSF being deemed non-compliant, leading to a tax bill equal to 45% of the total value of the SMSF’s assets.

However, certain investments (such as shares in golf clubs) may have golf club membership rights attached to them. These types of investments may be possible so long as the membership rights are merely incidental to the investment and the share investment is in line with the SMSF’s investment strategy; that is, that the investment will provide reasonable income and/ or capital growth prospects. This means the golf club investment should not be acquired for the purpose of providing membership rights to members or any other entity other than at market value. These circumstances are assessed on a case-by-case basis and you should exercise due care when investing in these investments. ATO ruling SMSFR 2008/2 provides additional information about the application of the sole purpose test which you may find beneficial.

Retirement strategy

I "retired" from my role with the local council in late 2008 aged 63. I say “retired” because my role was declared redundant, and I was paid to leave early as part of a new council restructure. For the past two years I have earned enough so as not to have touched any of our capital which consists of $140,000 cash (term deposit at 6.5% for 12 months) and $600,000 in super, plus a share portfolio worth about $10,000. We own our home and have no debt but when I read that I should be aiming for $1 million as a retirement fund, I get very worried. What concerns me is eroding the capital as super and term deposit returns are well below what were once conservative estimates of 7%. We have recalculated our annual expenses for 2011 at $47,500, and are making savings wherever possible. Would you consider this a reasonable strategy going forward?

It is certainly a good strategy to carefully review your expenses in preparation for retirement. The next step is to focus on what level of income can be generated from the capital that you have accumulated. Although investment returns cannot be guaranteed, the best way to earn your required level of investment return and reduce the risk of eroding your capital prematurely is through setting an appropriate asset allocation.

Defensive assets generally produce a higher level of income than growth assets so that may be desirable in your situation, but an allocation to growth assets will help ensure your funds do not quickly erode with the impacts of inflation. The key to determining the asset allocation that is right for you is to firstly assess your tolerance to risk. Retirees will have their own risk tolerance and priorities so it is highly advisable that you seek advice to determine your risk profile as your first step to structure a portfolio that helps you achieve your goals.

On your total super and non-super capital, you would need to generate a yield of approximately 6.5% per annum to generate $47,500, and additional capital growth would need to be achieved to keep this figure growing in real terms.

You may also find you are eligible for a partial government age pension from age 65, which can supplement your retirement income and allow you to save on some costs through the pension concession card, which assists with discounted pharmaceuticals, reduced property and water rates as well as certain utility allowances. A part age pension is available for a couple with a combined asset base of less than $978,000 and assessable income less than $62,795 per annum.

Death of a member

I have a mental blank relating to former s279D of the Income Tax Assessment Act (ITAA) where one can claim a refund of contribution taxes on the death of a member in a super fund. To meet an ability to pay out to the estate of a member who dies, we have created a reserve in our SMSF almost expressly to provide the required additional payment into the estate. We would then claim this additional payment back from ATO. But, if we use accumulation funds to create the reserve, are we not just taking money out of a member’s accumulation account only to hand it back later on death? What am I missing here?

It should be noted that s279D of the Income Tax Assessment Act (ITAA) 1936 has been rewritten and is now called the “Tax Saving Amount” in s295-485 of the ITAA 1997. The benefit of creating a “tax saving amount” reserve and then making an additional anti-detriment payment to the member’s beneficiaries or estate upon the member’s death is the potentially significant tax deduction which can be claimed. No physical cash refund is received, but a carry-forward tax loss attaches to the SMSF, which can be used by remaining and/or new members to offset their own contributions tax or tax levied on income generated within the fund.

The reasoning behind the creation of a separate reserve can cause confusion. You correctly state that fund earnings are being set aside from a member’s accumulation account only to be handed back to their dependants upon the member’s death. This is because in order to receive the attractive tax deduction, the physical anti-detriment payment must be made from a reserve of unallocated income, which is kept separate from other members’ accounts and new contributions.

Property and SMSFs

Can you move into an apartment held in your super fund once you are beyond preservation age?

One of the exclusive benefits of DIY super or self-managed superannuation funds is that the trustees of the super fund can choose to hold residential properties within the fund. However, this is not without restriction. A fundamental rule with all investments within an SMSF is that they must comply with the “sole purpose” test (Superannuation Industry (Supervision) Act 1993 (SIS Act) (section 62)). This test relates to the fact that trustees must maintain an SMSF for the sole purpose of providing retirement and death benefits for members.

While holding residential property within an SMSF will satisfy the sole purpose test if the property is maintained for investment purposes (that is, to produce income in the form of rental payments and/or capital gain), if the members decide to move in and occupy the residence, the primary purpose of the SMSF will extend beyond providing for the retirement and death benefits of members. As such, regardless of reaching preservation age or older, living in the apartment would not be allowable as it would be a breach of the sole purpose test.

However, you should keep in mind that by reaching your preservation age and satisfying a condition of release, you would be able to transfer the apartment held within your SMSF into your personal name, which you can then move into and occupy. But bear in mind, the transfer of ownership from your SMSF into your personal name will incur stamp duty, lump sum super tax (if aged under 60) and may also attract capital gains tax.

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