Tax with Max: Are two SMSFs better than one?

Setting up a new SMSF in pension phase, depreciation deductions, public service super, and more.

Summary: What is the best way to transfer a self-managed super fund from accumulation phase to pension phase? One option is to set up a second fund, while another is to segregate the existing fund into accumulation and pension accounts.

Key take-out: Setting up a new SMSF to hold accumulation phase superannuation accounts, and retaining an existing fund that would be put into pension phase, would be highly costly. The better option is to split a fund into both accumulation and pension accounts

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Are two SMSFs better than one?

There appears to be conflicting advice regarding the most efficient way to transfer your SMSF from accumulation phase to pension phase once you have turned 60. I understand that I could have gone into transition to retirement from 55, but have left it to the age of 60. I intend to continue working however, and income is not assured and cannot be depended on.

There appear to be two alternatives. Put the existing SMSF into pension phase and start a new SMSF, which will be in accumulation phase, or segregate the existing SMSF into a pension phase and an accumulation phase, which will incur higher accountancy fees. Which of the two options do you believe is best? My understanding is that this is easier for our accountant, cleaner and will involve less accountancy fees.

Answer: Setting up a totally new SMSF that would hold your accumulation phase superannuation accounts, and retain your existing fund that would be put into pension phase, would be your worst option. Not only would you have to pay for the set-up of the new fund, the extra accounting costs for the new fund would be greater than the extra accounting costs of having a super fund with both accumulation and pension accounts.

One of the reasons having an extra SMSF creates a greater cost burden is that the new fund would also have to be audited, which would not be the case if you have one super fund with both accumulation and pension account members.

There would be an extra cost of obtaining an actuarial certificate, but this would be less than the cost of an audit. If your current accountant is recommending the setting up of a new SMSF I suspect that he is doing this as he will be the winner and you could be the loser.

Is it compulsory to claim depreciation deductions on a property?

We have a couple of properties that have reasonable amounts of depreciation that could be claimed due to being fairly new. However, as we only have investment income and minimal taxable employment income we are both below the tax thresholds when we include the depreciation deductions. Given that the cost bases are being driven down, it will mean a large capital gains tax issue when we sell, without getting any real benefit from the deductions along the way. Is it compulsory to have depreciation applied to a property for tax and cost base purposes?

Answer: There is nothing in the Tax Act that forces you to claim a deduction, either for the depreciation of the fixtures and fittings in a rental property or a 2.5% deduction for the capital cost of the building. In my professional life I have often taken over clients where the previous accountant didn’t claim the deductions and we have had to go back and amend tax returns. I did not have to amend the returns, but it produced tax refunds.

This means that you do have to claim either the depreciation of the fixture and fittings or the capital write-off. As a result, you will not be claiming the capital write-off and you will not be decreasing the purchase cost of the property and increasing the capital gain once the property is sold.

What are the superannuation rules around redundancies and public service funds?

My daughter currently works in the federal public service and is considering voluntary redundancy. Does she have to transfer her superannuation to another fund or can she leave it in the existing fund and contribute to it in any future employment?

Answer: The ability of your daughter to remain in her current superannuation fund will depend on its rules and regulations. I know of some cases, especially defined benefit government superannuation funds, where a member is unable to make further contributions into the fund. She should contact the member’s services department of her current super fund and confirm with them what their rules and regulations are.

What are the rules around starting and stopping a super pension stream?

I was interested to read your article on when a super income stream exists. Have you considered the case where a pension is stopped and restarted each year, so as to include contributions made the year before (a common practice), and where it is convenient to take just a single payment?

Answer: The ATO recently issued guidance notes for trustees of SMSFs in relation to what constitutes the starting and stopping of a superannuation pension stream. In most cases, the information provided is very helpful for SMSF trustees.

The guidance notes includes the following, “an income stream cannot be a pension in accordance with the SIS regulations unless it meets two fundamental requirements:

  • payment occurs at least annually;
  • for account-based pensions, a minimum amount is paid to the member each year.

A super income stream exists when all of the following apply:

  • a member is entitled to a series of payments that relate to each other;
  • the payments are periodic, whether paid annually or more frequently;
  • the payments are made over an identifiable period of time;
  • the pension standards the SIS regulations have been met”.

The guidance note supports the fact that when applied to a new pension that is started each year with one annual payment, as a result of the previous year’s pension being rolled back to accumulation and combined with contributions of that year, there should not be a problem with it being classed as a complying pension by the ATO.

There is, however, one problem in relation to the strategy of making an annual payment where an account-based pension is stopped every year and a new one commenced the following year. This would be in a situation where a member dies before the annual payment has been made. As no payment would have been made, and the previous year’s pension had been terminated with a new one starting, I do not believe the minimum pension payment requirement would have been met as there would not have been a series of payments.

Where an account-based pension is paid as an annual payment, and the member dies in the second year, I believe that in this case the members account would be held to be in pension phase by the ATO. To be on the safe side, and avoid the member’s account not being classed as in pension phase in the event of their death, it may be wise to take at least half-yearly payments.

Clarifying minimum payments for pensions started in June?

I noticed in your Eureka Report column (Tax with Max: Why pension timing is everything) you warned against starting a pension on June 30 as a minimum payment would be required. You repeated this warning the following month. I believe that you are wrong in saying this as the ATO has stated that the requirement for a minimum payment excludes the situation where a pension is started on or after June 1 in respect of that financial year.

Answer: You are 100% correct in what you have said. In fact, the ATO states in the guidance notes mentioned in the previous question, “if the commencement date of the pension is on or after June 1 in any financial year, no payment is required to be made in that financial year”. In this situation where a pension is started in June of one financial year the minimum pension payment must be made in the following financial year.

The guidance notes also make it clear that when an account-based pension is started on a day other than July 1 of the financial year the minimum pension payment amount is to be calculated proportionately to the number of days remaining in the financial year after the commencement date of the account-based pension. In other words, if you start a pension on January 1 of a year the minimum pension that must be paid is 50%.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au