Tax with Max: consolidating accounts

What to do about consolidating funds, correcting under-payments, and more…

Summary: It’s important to carefully consolidate multiple funds to ensure the tax benefits of super funds are retained, which allows you to avoid paying multiple administration and accounting fees.
Key take-out: If you have inadvertently under-paid your pension in the first half of the year, it is possible to catch up in the second half.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Consolidating super funds

I am over 75-years old and have five pension funds from earlier contributions. Can I still make further super contributions from assets I hold in my own name, and is there a way I can reduce the number of pensions to save on accounting fees?  Is it true I don't have to take the minimum  pension if I don’t need to?

Answer: Once a person is 75-years or older they can no longer make voluntary concessional or non-concessional super contributions. The only contributions that can be made for someone who is 75-years or older are compulsory employer contributions.

There is nothing stopping you combining several of your current account based pensions into one pension to reduce the amount of administration and accounting fees. There is a process that you should however follow. Firstly you need to identify the components of the current pensions. In other words whether some are predominantly made up of taxable super and others have a large component of tax-free super. The next step is to commute or stop those pensions predominately made up of taxable super and then start one new account based pension from this amount. Finally those pensions made up of tax-free super are commuted or stopped and then a new pension started from their combined total.

If this process is not followed the tax benefits of having predominantly tax-free account-based pensions will be diluted and possibly lost. From a strategy point of view when extra income is required, over and above the minimum pension required to be paid, this should be taken from the account-based pension made up of predominately taxable benefits.

How to correct inadvertent under-payments from account-based pensions

In December last year we inadvertently took a half-yearly income stream payment out from our account-based pension at 4 per cent. We are in fact 65-years of age and should have taken the half-year payment at 5 per cent. Can we amend this situation by making another payment of a half-year payment at 6 per cent to meet the actual minimum requirement of 5 per cent? Also can we withdraw more than 6 per cent too?

Answer: To meet the minimum pension payment requirement for an account-based pension you must ensure that the minimum amount is taken by the end of the financial year. By taking your next half-yearly payment at a rate of 6 per cent before June 30, 2014 you will have met the minimum pension payment requirement. For account-based pensions there is only a minimum pension limit, but there is no limit on the maximum amount that can be taken during a year.

Pros and cons of capital losses

If I accumulated $100,000 capital loss in my SMSF while in pension mode, then transfer all my assets back into accumulation, can my SMSF use this $100,000 loss to offset a future capital gain? 

Answer: Under income tax law capital losses can only be used to offset capital gains. This means if an SMSF is in pension mode and a capital loss is made, it is carried forward to a subsequent year when a capital gain occurs. You should seek professional advice before implementing the strategy that you have outlined. By converting a fund back to accumulation phase you could be worse off because it will pay tax on the other income it earns, just to take advantage of an accumulated capital loss.

Timing the switch to pension phase

Is there a more tax effective method of timing the transition from accumulation to pension phase?

Answer: When is the most tax-effective time to switch from accumulation to pension phase depends on a person's circumstances. In some cases it can make sense to start a transition to retirement pension while someone is still working if this enables them to increase their superannuation contributions via salary sacrifice. If you are wanting to make the transition to a pension as tax-effective as possible it is best to do this at the start of a financial year. You should seek professional advice before making a decision in relation to this as there are many considerations, not only the age and income tax status of the person who will be receiving the pension, that should be taken into account.

What are the effects of the income test on account-based pensions?

I thought I should assess the likely damage and put the proposed change to the income test for account-based pensions. On the basis of a number of assumptions I have calculated by taking the minimum allocated pension and letting these assets grow until other income sources are exhausted, at which point you draw down the allocated pension as rapidly as needed, then the proposed rules will give you more age pension over time. Is this correct?

Answer: Despite the calculations you have done I don't believe that someone can be worse off by locking in the current treatment by Centrelink. Given that currently none of a person's account-based pension can be counted as income, due to the deduction for the purchase price of the pension exceeding the pension taken, I cannot see how having deeming rates applied to the balance of a person's superannuation will leave them better off.

There may be a situation where as a member gets older, and they are forced to take a higher minimum pension, the amount counted under the current rules may be higher than will be counted under the new deeming rules. Because a person can roll back an existing account-based pension at any time and start a new one, which would be counted under the new deeming rules, there should be no disadvantage in locking in the current rules before the deadline of December 31, 2014.

Can I transfer super directly into my pension?

I am over 65 and have an SMSF that is in pension phase. I am currently working and intend to work for three to four months per year as an employee. My employer will be contributing superannuation to an industry fund. Is there a simple way of transferring this money to myself as a pension?

Answer: Despite all Australians supposedly having the right to choose their own superannuation fund many, because of the award they are covered by or because they work for a government authority, are forced to have their compulsory employer contributions go to a fund that is not of their choosing.

In your case, with regular contributions being made by your employer, it would be too complicated to have the employer contributions converted to pension phase throughout a financial year. What does make sense is for you to roll over the superannuation accumulated each year on July 1 from the industry fund to your SMSF, and commence a new pension from the amount rolled over. You should seek professional advice to make sure that by rolling over superannuation from the industry fund you are not decreasing the tax-free component of your current account-based pension.

Failing the residency test for SMSFs

Does the setting up a corporate trustee for an SMSF get around the problem of the members being overseas for an extended period of time?

Answer: Setting up a corporate trustee to take over from individuals does not get around the problem of members being overseas for an extended period of time. This is because all members must be directors of the trustee company, and if they are controlling the super fund while overseas, though will fail the residency test.


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