- Reviewing crystallisation.
- Pensions or lump sums?
- Where to park $1 million.
- The proportioning rule.
I mentioned to my accountant that the 2007 crystallisation for my SMSF had not been calculated. The reason this was important was that many undeducted contributions had been made prior to 2007, when I started my SMSF, and my first employment with superannuation started in 1968. I think the accountant did calculations from the SMSF start date as opposed to retrieving the original rollover documents to get the actual crystallisation start date. I received an email a few days later saying the calculations had not been correct and the accountant was having talks with their software provider and the auditor. My question is: do all the tax returns and audits need to be done again and, if so, who should pay?
All the tax returns and audits should be completed again, right back to June 30, 2007, to ensure that all member balances and the fund balance are crystallised correctly as at that date. As it currently stands the components of the fund are incorrect, which may have led to members having paid additional tax over the past couple of years, so fixing the accounts will ensure members’ tax positions can also be corrected. Once completed, members will also be able to assess potential tax implications if, say, they intend to pay death benefits to non-dependants in the future. It’s not an uncommon mistake and professional accountants have solved the issue for no extra charge.
Pensions or lump sums?
Are SMSFs allowed to pay lump sums or are they only allowed to pay pensions? And is this correct for any situation, with any kind of trustee?
This is a very simple question with a very technical answer! Individual and corporate trustees are regulated differently, hence there is a distinction as to how an SMSF with each trustee structure can pay benefits. To keep it simple, an SMSF with either trustee structure is allowed to make both types of benefit payments. However, the fund with the individual trustee structure must also specify in the trust deed that lump-sum payments are also allowed, which works alongside the requirement to state that the fund’s sole (primary) purpose is to provide age pensions for members.
Parking a million
I’m about to retire with $1 million currently outside super waiting to be invested. Is super still the best vehicle for this? It will have to be in a joint name so do the changes in tax-free thresholds make direct investment a better option when all costs are considered?
A superannuation account in pension phase will remain a tax-free vehicle for those over 60, so if you could invest the $1 million into super, even in two separate accounts, then there will be no tax to pay assuming you are over 60 and the accounts are in pension phase.
If you invest, say, $500,000 in two separate personally owned investments and each generates personal taxable income of, say, $30,000 a year, then tax will be about $2000 per annum per person; a total of $4000 using the proposed tax rates for 2012-13. Then there are potentially large capital gains tax issues that can be avoided with a SMSF.
Plus, holding the funds in super will also provide other benefits, such as asset protection and estate planning. If you already have superannuation accounts, pensions or otherwise, then you should investigate further adding to them and using superannuation pensions.
What is the proportioning rule and how is it applied to super?
The proportioning rule is the requirement to pay the tax-free and taxable components of a member’s superannuation benefits in the same proportion as components (tax-free and taxable) of the member’s interest in the super fund.
The proportioning rule is used to calculate how much of a superannuation pension payment will be tax-free versus taxable. It is generally only a concern in three circumstances: first, for those who retire before the age of 60; second, for those members of an older, untaxed public sector fund; and third, for those who intend leaving super death benefits to non-dependants. In these instances there is likely to be some tax payable on a member’s benefits, which stems from the taxable component of the member’s superannuation balance.
Angelo Veschetti is a partner, adviser and compliance manager at Donnelly Wealth Management.