Tax with Max: investing in super

An SMSF needs to draw up and comply to a detailed investment strategy before it can trade livestock.

Summary: This article answers questions on taxing super payments; changing payment calculations, ensuring a fund remains compliant; buying cows with an SMSF; buying investment property and tax audits.
Key take-out: A Transition to Retirement pension needs to be established to draw a pre-retirement pension for under 60s.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

How much tax will I pay on a pension drawn between the age of 55-60?

My wife and I are the trustees and members of our SMSF. I turn 55 in 2014 and intend to keep working full-time until I am at least 60. I understand that I can access between 4 per cent and 10 per cent of my part of the fund’s assets from the age of 55.   However what I would like to understand is how much tax I will be required to pay on the funds I withdraw between the age of 55 and 60.
For many years a person has been able to access their superannuation by starting what is called a Transition To Retirement pension. Unlike account-based pensions, that only have a minimum pension payment amount, TTR pensions also have a maximum of 10 per cent that can be taken. The taxation treatment of a TTR pension for someone under 60 will depend on the makeup of the accumulation account paying the pension. The portion of the TTR pension made up of Tax-free superannuation, these tend to mainly come from non-concessional un-deducted contributions, is received tax-free. The portion of a TTR pension made up of taxable superannuation has tax paid at the person’s applicable marginal tax rate, which is decreased by a 15 per cent tax offset.

Can I change the basis of my pension payment calculations?

I am the sole member of my SMSF and began a Complying Growth Pension at age 65 on the 18 February 2005. The amount of pension payment is calculated by dividing the fund balance at 1 July each year by a factor related to life expectancy at that date. Am I able to change the basis of the pension payment to that of the minimum payment table of Simplified Super, where the fund balance at 1 July is multiplied by a percentage factor based on age? If so, can I do this by a minuted request to the fund trustees?

Answer: The type of pension that you describe can no longer be taken out. My understanding is that pensions in this case were effectively a whole-of-life pension. They had advantages attached to them that meant their value was not fully counted by Centrelink. They were lifetime pensions and could not be commuted. This means you cannot get the benefit from the lower pension rates that apply account-based pensions.

How do I ensure my fund is compliant?

I am 72 years old and my wife and I are trustees for our SMSF, which owns a shop worth $1,250,000 and a share portfolio valued $680,000. The SMSF bought the shop for $275,000 from my Family Trust, whose active beneficiaries are my two adult sons, who paid CGT on approx. $130,000, when it bought the shop. The transactions were done through solicitors and we have always lodged tax returns through our accountants and their auditors. The SMSF also made $96,000 profit during 2009 to 2011 on the share portfolio. Because it is in a pension phase no tax was payable on the rental income or share portfolio gains. During the last 18 months the portfolio has lost approx. $630,000. If these transactions were done at market values is the SMSF still non-compliant? Are the share portfolio's profits of $960,000 taxable at 45 per cent or can we offset the latest losses against the earlier gains?
One of the few assets an SMSF can purchase from members and related parties is business real property. This means the shop sold to your SMSF by your family trust could be purchased and your fund should not have any problems with being made non-compliant. From what you have described the $960,000 gain made on the shares is an unrealised gain. It also seems that the loss made is also an unrealised loss. This effectively results in a net gain of $330,000. Tax would only be payable by the fund if the shares are sold and the gain is realised. If your SMSF stays in pension phase no tax would be payable.

Will I be able to buy an investment property through my SMSF and move into it a few years later?

I’m 56 and own a rather large property in my own name. I’d like to purchase an investment property and rent it out for a few years using my super fund. In a few years I’d like to sell my house, down-size and then move into the investment property. Can you please confirm if this can be done?

Answer: As long as the rental property is not purchased by your super fund from you or a related party there is nothing stopping your SMSF doing what you are proposing. The only complication is that the property would have to do be sold by the SMSF to you when you decided to move into it. You should seek advice from a fee-for-service adviser specialising in retirement strategy. This is because, depending on your personal situation, it may be better if you buy the rental property in your own name using borrowed funds. When you sell your existing home you would use the proceeds to pay out the loan on the rental property and, depending on your age and work situation, possibly use any excess funds to contribute to your SMSF.

Can my SMSF buy and sell livestock?

I have a SMSF which has 4 family members and I want to purchase some cows in the fund at $1200 each in July then sell the calves on average at $600 in February, followed by mated cows in March for $1000 which will show a healthy return. I own the property where the cows will be kept. Is this possible?
Your super fund will only be able to make this investment if it is permitted by its investment strategy. In addition all of the activities related to the buying, raising and selling of the livestock would need to be done commercially. This would mean that if the super fund is using some of your property for raising the cattle an agreement would need to be drawn up between you and the super fund with agistment paid by the super fund to you at market rates. The super fund would also need to be responsible for any other costs associated with rearing and selling the cattle. Before undertaking this venture you should discuss it with the fund’s accountant and or auditor.

How many SMSFs are there, and how many are audited?

My accountant is "offering" me insurance to cover me for the additional fees an ATO audit would create. The question is how many SMSFs are operating and how many are audited every year?
There are currently in excess of 470,000 SMSF's in Australia. The compliance activity of the ATO in relation to SMSF's is increasing every year. If your fund is selected for an audit or some other compliance activity the time and cost spent by your accountants in assisting the fund through the audit could be considerable.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.

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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