Tax with Max: In perpetual accumulation

Keeping a fund in accumulation mode, tax on rental properties, and more.

Summary:  An SMSF can be left in accumulation mode indefinitely under the current rules. Accumulation accounts pay 15% tax on the income they earn whereas an account in pension phase pays no income tax or capital gains tax.
Key take-out: Having retirement investments inside superannuation, rather than outside, result in an individual receiving a tax-free income when they need it. Income earned outside of super is taxable.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Can an SMSF be left in accumulation mode indefinitely?

I am 40 and my husband is 45. We intend to be in the position to retire when I am 45 and my husband is 54. At the point I retire we will stop contributing to superannuation except the minimum super payable on my husband's salary. We will not draw on our investments until my husband retires two to five years after I retire.

We’ve worked hard and invested consistently, giving us approximately $6 million at the point my husband retires. Our SMSF will contain about $1 million at my husband's retirement which, all going to plan, we won’t actually need.  We never wanted to rely on our super to meet our retirement needs due to the constant tinkering. I can find the minimum percentages you need to withdraw once you start a pension, but is there a maximum age for which the fund can stay in accumulation mode, or can you essentially leave the SMSF in accumulation mode indefinitely?

Answer: Your concern about the constant tinkering with superannuation by successive federal governments is valid. However, this constant tinkering should be an incentive to maximise your superannuation under the current rules rather than restricting your super contributions. Apart from the retrospective taxing of superannuation pension accounts that earned more than $100,000 in income that was proposed by Labor, changes to taxation of superannuation have always preserved existing benefits.

Under the current rules a person can keep their superannuation account in accumulation phase forever. There is no requirement for a person to take a pension from their superannuation. The problem with you having most of your investments outside of superannuation will be the income will be taxable. If you centred your retirement investments more in superannuation, this would result in you receiving a tax-free income when you need it.

The other thing to consider is that accumulation accounts pay 15% tax on the income they earn whereas an account in pension phase pays no income tax or capital gains tax. You should consider obtaining tax and retirement planning advice from a fee for service adviser who can also help you with investment advice related to your SMSF.

Tax on a rental property that becomes a principal place of residence

I have an investment property that I purchased in 1990. I am considering selling the family home and relocating to the investment property so that it becomes my principal place of residence. What are the capital gains tax consequences for my estate in the event of my death, assuming the investment property has become my principal place of residence at the time of my death?

Answer: Selling your family home and moving into the rental property will not mean that the entire value of the rental property will become tax-free. The increase in the value of the rental property, from the time it becomes your principal place of residence, will be tax free. This means your beneficiaries must pay capital gains tax on the increase in the value of the property from 1990 until when it becomes your residence.

Transferring shares into a SMSF

I have an investment portfolio worth $750,000 and I want to transfer this into an SMSF. I currently have two industry super funds that hold $300,000. My portfolio has a $430,000 debt but returns me approximately $38,000 in dividends. I also have lots of options, most at a premium, and if I were to exercise them would have new shares yielding 8%. What strategies can I use to get the portfolio into an SMSF?

Answer: If you want to transfer the investment portfolio into an SMSF your first step would be, after having one set up, to roll over the $300,000 currently with the two industry funds into it. The ability for SMSFs to borrow relate to a single asset being purchased, such as a property, and therefore I don't believe it would be appropriate to your SMSF to borrow to help fund the purchase cost of your portfolio.

You could, however, look at using the $300,000 that would be in your SMSF to purchase this value of shares with the funds being used to pay out most of your loan. You could then sell some of the remaining shares to pay out the balance of the loan and, depending on your ability to make non-concessional contributions, contribute to the balance of the shares as an in-specie contribution.

There will, however, be capital gains tax implications and superannuation regulations that will need to be taken into account. You should therefore seek professional advice before taking any action.

Changes to the HECs discount

There used to be a 10% discount for paying HECS (Higher Education Contribution Scheme fees) upfront. Does this still exist and is it still worthwhile?

Answer: In the 2013 federal budget changes to the discount for lump-sum payments of HECS were announced. Under the current bonus scheme lump sums of more than $500 result in the debt being discounted by 10%. As a result of the changes this discount will to drop to 5% for the 2014 year.

There was a large number of legislative initiatives that had not been passed before the federal election. The legislation relating to the change to the discount has now been introduced into parliament by the Coalition government, but I don’t believe it has been passed. Given that this was a Labor party policy there is every likelihood that it will be passed in the future.

Even if the discount has been decreased to 5%, given that this is a non-taxable benefit, in this current low interest environment it is hard to find something that will produce a better return without a major increase in risk.

Paying death benefits to non-resident children

I have a binding death benefit on my super with my three children as beneficiaries. You have explained that the tax payable on the taxable component on my death would be 16.5%. Is this still the case if they are overseas residents?

Answer: It should not matter whether your children are not tax residents at the time they receive your superannuation upon your death. This is because superannuation payments to non-dependants are taxed at the 16.5% rate. This is often done when the super is paid to the executor of your estate, who then pays the tax on behalf of the non dependant beneficiaries.

Clarifying the contribution limit for individuals aged 59

I turned 59 on January 7, 2013, so as at July 1, 2013 am I considered to be over 59 or do you have to be 60 on that day? I thought that my concessional contribution for the 2014 financial year would be $35,000 but my accountant tells me that it is only $25,000. Is he right?

Answer: Your accountant is wrong in relation to your maximum contribution level for the 2014 year. Unlike other previous contribution limits, which were based on a person’s age at the end of a financial year, the new increased contribution limit is based on a person’s age at the start of the financial year. For the 2014 year anyone who was aged 59 or older at July 1, 2013 is able to contribute up to the $35,000 maximum concessional contribution limit.


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

Related Articles