Key take-out: Superannuation assets are included under Centrelink pension assessments once individuals start receiving a pension from the fund, and independent advice should be sought to ensure couples make the most of a joint SMSF when one begins to take a pension while the other partner is still below the pension age.
Key beneficiaries: SMSF trustees and superannuation accountholders.
I am moving into my ex-investment property. When do i need a valuation?
You recently responded to a CGT questions about someone selling their current home and moving into an ex-rental property, at which time the rental would become the principle place of residence. If this were done, would it be wise to obtain a valuation at that point in time of moving into the rental property? I could see a scenario whereby an investment property owner takes possession in order to ready the rental property for sale. The owner might spend 12 months improving things which improves the value considerably, hence the question I pose of getting a valuation at the time of taking possession.
Answer:. When a property has been used for income-producing purposes, and then becomes a principal place of residence, there is a requirement to get the property valued at the time that the use changes. Registered valuers are able to assess a property at any previous point in time based on the historical property data they have access to. It is not a requirement for the valuation to be done at the time the usage changes. Given the scenario you have outlined, of the owner doing substantial improvements to a rental property to get it into position for it to be a home, it would be best if the valuation is done as close as possible to the time the usage changes. This will ensure that the value placed on the property is as low as possible thus limiting the amount of capital gains tax that would be payable when it is sold.
I am just over the asset limit to qualify for the pension. Should I combine my assets with my wife's in our SMSF?
I am slightly over the asset threshold to qualify for the age pension. I am 66 and my wife is 54 and we are both members of our SMSF. If a contribution was made by her, would her assets within the fund be kept separate for the assets test, or be combined with mine? If our funds are combined for assessment in our SMSF, would putting some cash into her industry fund solve the problem of me being over the limit?
Answer: The value of a person’s superannuation is counted by Centrelink as an asset under the assets test when they are either of ‘age pension’ age or they are receiving a pension from their super fund. This means the value of your wife’s superannuation will not be counted as an asset by Centrelink as long as she does not start a pension from the fund until after she reaches ‘age pension’ age. Depending on the value of your own superannuation account within the SMSF you should consider seeking professional advice. There is a strategy that could improve your financial position if you take a lump-sum payment. The amount withdrawn would then be contributed by your wife as a non-concessional contribution and possibly increase your entitlement to the age pension.
We would like to retire on $80,000 a year. What advise do you have?
My wife earns around $60,000 a year and currently has $120,000 in super. She should also receive about $90,000 from a property sale in about 3 to 5 years. I earn $100,000 a year, am salary sacrificing around $21,0000, and if I remain employed want to retire in about three years. I have around $380,000 in super and $85,000 in shares. Our home is worth $700,000 with a loan of $150,000 still owing. At some point over the next five years I will inherit around $1.4 million that is currently invested in funds and shares. About half is held in an investment bond within a trust with any earnings reinvested. Once we are both retired we would like live on about $80,000 per year. We would also like to spend three months of each year living somewhere else such as Queensland or overseas. Any thoughts on how this could be achieved?
Answer: From what you have outlined you should seek tax and retirement planning advice from a fee-for-service professional who specialises in this area. In addition to income tax, there are other matters that would normally be considered by someone providing this advice, such as estate planning. There are a number of strategies that could be considered by the person providing the advice. It does not make tax sense to have $85,000 in shares and still owe $150,000 on your home. Depending on any capital gains tax that may be payable on your shares it could make sense to sell them, pay as much as possible off your home loan, then borrow to invest in shares. The tax savings made by doing this could be used to pay off your home loan sooner. You could also look for a Queensland investment property that you would both be happy to live in for three months a year once retired, that would be financed through a loan, you would receive some negative gearing tax benefits, then once you receive your inheritance the loan would be paid off. From the assets you have now, and will be receiving over the next few years, obtaining the tax planning advice should mean that you won't have too many difficulties in achieving your desired income in retirement.
Explaining account-based pensions
You recently wrote, "an account-based pension started at the beginning of a financial year will be deemed to have been in pension mode for that full year, even if the person owning the fund does not turn 60 until later in the financial year". I turn 60 in May 2014 and could start a pension after June 1. By starting an account based pension at the end of the financial year will that mean I have been in pension mode for the full year? \
Answer: Whether a fund is in pension mode or not does not depend on a person's age, it depends on whether they have met a condition of release to access their super in the form of a pension. The point I was making about turning 60 was that a person can start a pension on July 1 of a financial year and, as long as they are 60 when they receive the pension payment, no tax will be payable by them. The favourable tax treatment of income received by a super fund in pension phase depends on the period of time that the pension was paid. In your example the fund would be in pension phase for only one month, and therefore only one twelfth of its annual income would be not taxable.
Making distributions from the family trust
I have a child turning 18 in early June 2014 who is in full-time study at university and not earning any income. We are considering making a distribution from our family trust to cover her HECS fees and living costs after she turns 18 but before the end of the financial year. If we do this Is she taxed at the normal thresholds and marginal rates for adults or are the thresholds prorated for the amount of the year for which she was over 18?
Answer: Under income tax law, the age of the beneficiary at June 30 is what dictates whether they are classed as an adult for income distributed to them by a family trust. As it is often the custom that the distribution minute is dated June 30 each year, and the income is not regarded as being earned by the beneficiary until the distribution decision has been made, technically the beneficiary is not receiving the income until they are 18 years of age. This means they are taxed at normal adult tax rates and not the punitive rates that apply to minors.