Tax with Max: Maximising pension options

Maximising pension options, commuting a pension, interest deductions, and more.

Summary: If an existing pension account is made up of both taxable and tax-free superannuation, it cannot be commuted and a new pensions from the different components. But there are a lot more options available to someone with a pension aged under 65, using superannuation recontribution strategies and taking advantage of the three-year pull-forward rule.

Key take-out: The commuting of a pension can be done at any time throughout the financial year, and new contributions can also be made to a fund at any time during a year.

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

Maximising pension options

I want to commute my single pension to allow me to start two new pensions, one made up of taxable amounts, the other of non-taxable, to allow me to draw more heavily on the taxable pension to the possible future benefit of my non-dependent daughters/grandsons. I am advised that any new pensions would each contain the same proportions of taxable and non-taxable. If this is correct there appears to be no point to my commuting my current pension. Would you please comment or make suggestions.

Answer: If your current pension account is made up of both taxable and tax-free superannuation you are unable to commute that pension and start new pensions from the different components. Your situation highlights an important point that people should keep in mind as they get close to the age of 65.

If you are under 65 you could commute your current pension and take a lump sum of $690,000. You would then start a new pension from the balance of your superannuation account, contribute $150,000 before June 30, 2014, contribute $540,000 after July 1, 2014, then commence a new account-based pension that would be made up entirely of tax-free superannuation benefits.

If you are 65 or older this will mean that you must meet the work test to be able to use this re-contribution strategy. You would also be limited to only contributing up to the annual non-concessional contribution limit as you would not have access to the three-year bring forward contribution limit. Before taking any action in relation to your plans you should seek professional advice.

When can a pension be commuted?

Is it correct that a self-managed super fund in pension phase can be rolled back into accumulation phase on the June 30, at which time money can be added and then a new pension is then commenced on July 1 of the new financial year?

Answer: The commuting of a pension can be done at any time throughout the financial year and new contributions can also be made to the fund at any time during a year. When new contributions are made to a super fund, and the only accounts for members are paying pensions, the contributions will go into new accumulation accounts for those members making the contributions.

Where the new contributions are non-concessional and result in tax-free superannuation benefits there can be a disadvantage in commuting an existing pension that is made up of mainly taxable superannuation. It can make sense to keep the existing pension going and commence a new pension from the non-concessional contributions. Before taking any action you should seek professional advice.

Can all interest deductions be claimed on an investment property loan?

I have this month remortgaged my own home and gone for a split loan, increasing the amount by $100,000 on an interest only basis. I am purchasing an investment property for $538,000 with a mortgage for $430,000 interest only. The balance of the purchase price is made up of the $100,000 borrowing plus $8,000 in cash. Am I able to claim a tax deduction for interest on the $430,000 and $100,000 loans as these are related to the one investment. I am buying the house under my newly created family trust.

Answer: You will be able to a claim a tax deduction for the interest paid on the combined loan total of $530,000. In addition, you can also claim all of the other expenses relating to the property. You should think about obtaining a depreciation schedule from a quantity surveyor. In most cases the cost of obtaining one of these schedules is more than outweighed by the increased depreciation deduction and building write-off claim.

Can a SMSF invest in US ETFs?

I set up an self-managed super fund in the last 12 months and mainly invest in listed investment companies and exchange-traded funds. With the recent fall in the Nasdaq I was looking to see if there was an ASX-based ETF for the Nasdaq, but there appear to be none. Is it possible for Australian investors to invest in US-based ETF funds for the Nasdaq and other indices?

Answer: As long as the investment strategy of your SMSF allows you to invest directly in these types of investments there is nothing stopping you investing in the US-based ETF funds. You may want to look at investing via Vanguard in the US as they have more funds to invest in compared to the Vanguard Australia funds available.

The government guarantee on bank deposits

I read with interest your answer to a question about the bank guarantee. If I have a total of $200,000 in an account at one bank and $100,000 in an account at a different bank, how does the guarantee work?

Answer: The limit of $250,000 for the government guarantee relating to bank deposits is applied on a per institution basis. This means you could have $250,000 with four different banks and all of your deposits would receive the government bank guarantee.

Income distributions after the age of 18

My daughter turns 18 on June 27, 2014. Would she be eligible for the zero tax rate on income distributed to her up to $18,200 in the 2013-14 tax year or would it be prorated for the four days that she is 18?

Answer: The age of a minor is determined at June 30 each year. It is common practice for the date on the distribution resolution or minute for a family trust to be June 30 each year. This being the case there is even more support for all of the $18,200 being assessed in your daughter's hands as an adult as she would not have had a right to that income until it was distributed to her when she was 18.

Are bonds essential as a portfolio asset?

If you read any text on retirement, they recommend a portion of your retirement savings be allocated to bonds. A growing theme in recent articles is longevity risk. Studies have shown that a portfolio that doesn't have a high percentage of growth assets is more likely to fail (i.e. run out of money while still in retirement). My question is whether you need bonds as an asset in your portfolio at all?

It appears that including them increases longevity risk, with little benefit other than some capital stability. If a retiree has two-three years living expenses in cash, with growth assets (property and shares) who’s yield is equal to or greater than living expenses each year to replenish the cash reserves, are bonds redundant.

Answer: As to whether bonds are redundant in an investment portfolio for a superannuation fund is very much a matter of personal choice. I do, however, believe that the more a person has in their superannuation fund, and they are either already drawing a pension from their fund or not far away from when they will be, it is important to have a balanced investment portfolio.

Government bonds are but one of the available investments in the fixed interest area. There are other fixed interest investments that will provide a higher return than bonds that still bring with them a degree of capital protection.

Trying to protect yourself against longevity risk should obviously be something that you are concerned with. However, if you have over allocated to growth investments, such as shares, another major crash in the markets could seriously put at risk the longevity of your superannuation assets.

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

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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