Tax with Max: Funds that don't pay tax

In my answer to a question last week about how to compare super funds, I stupidly ignored the fact that there are some superannuation funds that do not pay tax. These tend to be defined benefit government superannuation funds and this makes the job of comparing them against taxed super funds extremely difficult.

Although members can benefit from an untaxed superannuation fund not paying tax during accumulation phase, tax is paid at a higher rate when it comes to withdrawing funds from an untaxed fund. Where a person is 60 or over, the first $1.315 million received from an untaxed fund is taxed at 16.5%. Any payment received in excess of the $1.315 million is taxed at the top marginal rate plus Medicare Levy.

Where a lump sum is paid to someone under 60 the first $180,000 is taxed at 16.5%, the amount received from $180,000 to $1.35 million is taxed at 34%, and any excess received is taxed at 46.5%.

Where a pension is received from an untaxed superannuation fund, and the member is 60 or older, tax is paid on the pension at the applicable marginal rates with a 10% offset applicable. For a pension paid to someone who is under 60, tax is paid at the normal marginal rates from an untaxed super fund.

By comparison, lump sums and pensions payments received from taxed super funds are not taxed when someone is 60 or over. Where pensions are received from a taxed fund, and the person is under 60, tax is paid at the marginal tax rate, with a 15% tax offset available. Lump sum payments to someone under 60 have no tax paid on the first $180,000, with the excess taxed at 15% plus Medicare Levy.

Maximising eligibility for the age pension

I am a male 62, work part-time and receive Newstart. My partner is 64, and is in a similar situation. We own, and are trustees of, an SMSF. We recently attended a Financial Information Service at Centrelink to plan for my partner’s intended retirement at 65. We were advised, in writing, that we could transfer sufficient of her super balance within our fund to me so that her balance reduces to below $165,000, then she qualifies for a full age pension and my Newstart is unaffected. Your advice indicates that such a transfer cannot be executed.

Answer: In actual fact the advice you have received from Centrelink is very sound and is a common strategy used for maximising a couple’s eligibility for the age pension. Until a person reaches retirement age, currently 65 for most people, the value of their superannuation is not counted under the assets or income test as long as they are not receiving a pension from the super fund.

This means, in your situation, if your partner has access to her super she could withdraw the excess super that she currently has, you could contribute this as a non-concessional contribution for you, as long as the contribution limits have not been exceeded previously, and she could start a pension from the remaining superannuation. Before taking any action you should seek professional advice to make sure that you actually will be better off.

What is the best way of purchasing life insurance?

I am 39 married, with two children, and my wife is not working but intends to work when both children are at school (three years’ time). We have a $100,000 mortgage on our home, which will be paid off in three years, and our super is over $1 million. I am looking to take out life insurance for the next five years, and by then the mortgage will be paid off and our super and savings will be in a position where my wife won’t have to move home and she’ll be financially sound if something happened to me. Where is the best place to purchase life insurance: the super fund or in my name?

Answer: As is usually the case, the best place to purchase life insurance depends on your personal circumstances. If you have sufficient cash flow, can afford to take out the life insurance personally, and also contribute to super up to the maximum contribution limits, not taking it out in a super fund will mean that your superannuation will be maximised. This is because the value of your superannuation will not be reduced by the cost of the premiums.

If, on the other hand, you are not able to maximise your superannuation contributions it makes sense to take out life insurance within superannuation. This is because you can fund this with pre-tax salary through salary sacrifice. Unlike income protection insurance, which is tax-deductible, life insurance is not.

If you are going to take out life insurance within super this could become a major determinant of what superannuation fund your use. The large industry super funds are able to use their purchasing power to provide life insurance at much lower rates than commercial funds. In addition, as long as the fund is receiving SGC contributions, the level of cover is a lot higher without having to pass numerous health tests.

What forms need to be lodged to go into pension mode?

My husband and I have a joint SMSF, with equal amounts each. For him to go into pension mode, having reached 75 and stopping work, are there special forms to fill in and lodge with the Taxation Office? Or do we just draw out the minimum from his, 50%? My auditor is vague about the paperwork.

Answer: It seems that your auditor is not providing you with the advice and help that you really require, as the steps to take are very straightforward and detailed on my website. As your husband is over 60 there is no need to register for PAYG withholding tax with them. This means, if he starts a pension, there is nothing that needs to be lodged with the Tax Office until the tax return for the fund is prepared.

Whenever trustees need to work out what documentation must be prepared they should always first check the trust deed for their SMSF. If the trust deed does not detail what documentation needs to be prepared, a simple letter from your husband to the fund requesting the pension should be written, a resolution of the trustees of your fund should be passed stating the pension will be paid, and there should also be a letter from your fund to your husband stating that the pension will commence.

The proposed super tax and multi-member SMSFs

We operate a four member SMSF where the assets are not segregated and where the annual benefits accrued as a result of operations are apportioned out to the four members’ accounts. These benefits are a net combination of dividends, realised gains/losses and unrealised gains/losses. 

What do think would be counted as ‘income’ under the proposed legislation to tax income earned over $100,000 on a pension account?  My worry is where we have an exceptionally good year and say, I was heavily exposed to equities (i.e. 2013), then unrealised gains could easily top $100,000, only to disappear the next year when the market dives.

Answer: From the initial information released when this policy was announced it appeared that only realised capital gains would be included in the income counted. This is because the taxable income of the fund was to be used, rather than the accounting income that includes unrealised gains.

The Abbott Government has stated that it will not be introducing any detrimental changes to superannuation during this term of government. This means if it intends to introduce this tax it would more than likely be a policy it would take to an election. This would effectively mean Australians could decide whether this tax was equitable or not.

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.

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