Tax with Max: Reconfiguring mutliple pensions

We look at how to simplify multiple pension accounts to allow them to be distributed according to a will rather than automatically diverting to the remaining spouse.

Summary: It is be possible to convert diversionary tax-free pensions into a single non-diversionary tax-free account, but a binding death benefit nomination is also needed to ensure the money can be inherited without tax payable. 

Key take-out: Co-ordinated action should allow a superannuant to combine tax-free pension accounts with little, if any, tax implications.

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


Where there's a will there's a way

I have an SMSF that had three account-based pensions.  One is a mix of roughly 50/50 taxable and tax-free, one is 100 per cent taxable and another 100 per cent tax-free. I do not have an account in accumulation phase. Last financial year I made partial withdrawal of the 100 per cent taxable account and re-contributed it as a non-concessional contribution, which I converted to another account based pension on the same day the money was deposited into the super fund.

All of my pensions had been reversionary with my husband as the beneficiary. (We do not have dependent children.) I would like to change this so that the tax-free pensions could be distributed according to my will rather than being reversionary.  I thought I could combine the two 100 per cent tax-free pensions and make them into a (single) new tax-free pension, by converting them to accumulation phase first then converting back into a pension on the same day. 

As I do not have any accumulation accounts I thought I could do this, but I was told that I run a risk of them becoming partially taxable if I were to do that, even though they were both 100 per cent tax free and there was no other accumulation account that could contaminate them. 

I was told that if there had been any income since the tax-free pensions were established, one of them at least a year ago, income would be classed as a taxable component if I were to convert the pension into accumulation phase, and then when I started the account-based pension again, even if I started it back on the very same day that they went back into accumulation, the new pension would no longer be 100 per cent tax free.  Is this correct?

Answer: I do not believe what you have been told is correct, and am also unsure as to whether you need to change your pensions from being reversionary at present. There should not be any income that will be classed as taxable, given that the amount withdrawn from the 100 per cent taxable account-based pension was converted to a new account-based pension on the day you made the contribution.

Also by ceasing the two account-based pensions, which are made up of 100 per cent tax-free superannuation benefits, any income earned up to the date of the pension ceasing will be added to those pension accounts.

This would mean the closing balance of each tax-free pension would be made up of the opening balance, plus income earned to the date that the pensions were commuted, less any share of administration costs related to those pensions, and less any pension payments made to meet the minimum requirement.

With the two tax-free account based pensions ceasing on one day, and then a new account based pension made up of the two previous tax-free account based pensions commencing on the same day as the old pensions were commuted, the new pension should still be made up of 100 per cent tax-free superannuation benefits. At worst if any income was attributed to the accumulation account for the one day it would be such a minor percentage that it would not be worth worrying about.

From a timing point of view I do not believe an investor in this situation should change the new account-based pension, made up of the two previous pensions, from being reversionary to non-reversionary. They would only do this if they wanted this account-based pension to definitely pass to their children and not be available to their husband if they passed away before him.

If this is what an investor wanted to achieve they would need to make a binding death benefit nomination that would force their tax-free pension to be paid to their estate. This should therefore result in their tax-free superannuation benefits passing to their estate with their children receiving this money and not paying any tax.

Higher concessional contribution caps a way off for under-49s

I was looking to contribute $35,000 as a tax-deductible concessional contribution this 2016 financial year but you now have me thinking.  I am 60 and believe the ATO are OK with it, are you sure the cap is $30,000?

Answer: I am not sure what question I was answering when I quoted the $30,000 concessional contribution, but you are right. Someone who was 49 or older on July 1, 2015 has a concessional contribution limit for the 2016 year of $35,000. Everyone else has a general contribution limit for the 2016 year of $30,000.

The increased concessional limit for people who are 50 or older will remain in force until the general contribution limit increases to the same amount. Increases in the concessional contribution limit are made to reflect increases in Average Weekly Ordinary Times Earnings in $5000 increments.

After the Rudd Labor government cut the concessional contribution limit in half, to $25,000 for the 2010 financial year, and then instituted a freeze on increases in the limit until June 30, 2014, there was not an increase in the limit until the 2015 financial year when it increased to $30,000.

Interestingly this freeze did not need to be put in place because the accumulated increases in the contribution limits from the 2010 financial year did not reach $5000 until the 2014 financial year. It could take at least six more years before the general concessional limit reaches the special increased limit of $35,000.

The increase in AWOTE for the 2014 year was 2.5 per cent and for the 2015 year was 2 per cent. This means that after applying the AWOTE increases to the $30,000 general limit there has been an increase to only $31,365. If the increases in AWOTE continued at 2 per cent per year the general concessional contribution limit would not reach $35,000 until the 2022 year.

The increases in AWOTE would have to be at least 3 per cent per year for the concessional contribution limit to increase to $35,000 by the 2020 year. Once the concessional contribution limit reaches $35,000 the non-concessional contribution limit would be $210,000, while with the two -ear bring forward rule the limit would be $630,000.

Unfortunately looking this far into the future is a perilous exercise given the current debate on tax reform in general, and the many comments that seem to be continually made about how unsustainable the current superannuation system is.

One can only hope that that the politicians do not concentrate on maximising tax revenue collection with regard to the superannuation system, as too many past federal governments have, but put in place a sustainable and fair retirement income tax system.

Prior to the changes made on July 1, 2007 Australia was the only country to tax retirement income three times. The first on contributions, the second on income earned on retirement superannuation accounts, and thirdly when income was taken in retirement.

One of the few changes that could be made in the interest of fairness could be to limit the tax benefit received for non-compulsory employer concessional contributions to 19.5 per cent, being the difference between the 15 per cent tax on concessional contributions and the tax and Medicare levy rate of 34.5 per cent paid by most Australians.


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