Tax with Max: Reversionary pensions

Reversionary pensions and spouses, the work test, and more.

Summary: This article provides answers on reversionary pensions and SMSF non-member spouses, Maximum Benefit Limits in defined benefit funds, super contributions and the work test, lump sums from pensions, corporate trustees managing more than one fund, home office running costs, and in-specie transfers.
Key take-out: Purchasing an Australian property while living overseas will involve different treatments for income tax purposes. Tax could be payable on the increase in the value of a rental property when the owner ceases to be a non-resident and becomes a tax resident again.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Reversionary pensions and non-member spouses

I am the sole member of my pension paying SMSF. My wife and I are the trustees. She has no superannuation. I want to establish her as the reversionary beneficiary so that she takes over the fund and receives a pension on my death. Does she have to be a member of the fund for this to happen?

Answer: There is no requirement for your wife to be a member of the SMSF now as under a reversionary pension she will effectively automatically become a member upon your death. There will be some documentation that needs to be completed to evidence her becoming the reversionary pensioner. As you are individual trustees you will also need to find another person to act as a trustee for the fund after one of you has died.

Maximum Benefit Limits vs Reasonable Benefit Limits

I currently work for the defence force as a serving member and have just received a letter stating that I will reach my RBL. Does RBL and MBL still exist for all Australians? I thought these limits had been abolished.

Answer: I am not sure but I think the letter you have just received advised that you had reached your Maximum Benefit Limit rather than your Reasonable Benefit Limit. This is because, as you noted in your question, RBLs no longer apply to superannuation. Being in a defined benefit fund the letter would have been advising you that you have reached the maximum multiple of your final average yearly salary.

Super contributions and the work test

I turned 65 in the 2012-2013 financial year. Before my birthday I used the bring forward rule and put in $250,000 as a non-concessional contribution to our SMSF. Just before the end of June, I put in a further $200. Have I breached any rules? Do I need to reverse the $200 contribution?

Answer: By having initiated the bring forward rule with your $250,000 non-concessional contribution before you turned 65 you possibly have only breached one rule by making a further $200 contribution. This is the rule that requires a person to have worked 40 hours in a continuous 30-day period in the year the contribution is made after they have turned 65.

If you did not pass the work test in the 2012-13 year you would not have been eligible to make the $200 contribution. If this is the case you should contact the auditor for the fund and ask their advice as to how you can fix this situation.

Taking a lump sum withdrawal from a pension

I am over 65 and have multiple pension streams within my fund, which the adviser says cannot be consolidated further because each stream has its specific tax liability. I wish to make a lump sum withdrawal from the fund. Am I able to selectively withdraw the lump sum from the pension streams with the largest tax liability, or must the withdrawal come proportionally like the minimum pension from all of the pension streams?

Answer: The first thing you will need to do is to check your trust deed. That is the only place there would be anything that would stop you nominating the pension that you want to take a lump sum from. If there is nothing in the deed you could choose between one of two options.

The first is to cease the pension that has the higher taxable component, take a lump sum from this account that will now be in accumulation phase, and then re-commence a pension from the amount left over after the lump sum payout.

You could also take a lump sum pension payment from a specified pension account, being the account with the higher taxable superannuation benefits percentage. Care should be taken when using this option as, if you are on or can qualify for the age pension from Centrelink, this could have a detrimental effect under the income test.

Can a corporate trustee manage more than one fund?

My family has an SMSF run by members as trustees. My brother has a similar fund for his family. We are keen to convert to a corporate trustee. Is it possible to have one corporate trustee managing both funds?

Answer: Unless the trust deeds of your SMSFs do not allow a corporate trustee to act for more than just your fund, there is nothing I know of that would stop one company acting as trustee for both of the funds. The corporate trustee will however need to have all of the members from both of the funds being directors of it. Extra care will need to be taken to keep the investments of both funds separate.

Claiming home office running costs.

I am a 61-year-old self-funded retiree and all of my income comes from fully-franked dividends. I live in a four-bedroom house and pay $400 a week in rent. I have made one of these bedrooms into my own computer/study/library room. I spend a lot of time in that room on my computer on investment gathering and reading books on the same topics.

Can I claim any tax deductions pro-rata for using this room for investment purposes with regard to rent paid and electricity used? My friend suggested that because I am not working and my income is passive that I cannot claim anything! I find that hard to believe because I am generating income which is taxable, and surely it makes no difference as to how it’s generated?

Answer: Your friend is only half right. You will not be able to claim a portion of your weekly rent against the investment income you generate. Where your friend is wrong is that it would not affect its tax deductibility if you are employed. Unless a room can meet the test of being a place of business no tax deduction can be claimed for a portion of rent or interest on a loan, where a person owns their own home.

You will however be able to claim the running costs associated with the office. This would include power, light and heating associated with the office. You can either take the time and trouble to work out exactly what the actual running costs for the office are, or you can apply an hourly rate accepted by the ATO of 34 cents per hour that the home office is used.

In-specie transfer changes

I recently heard that the government decided not to proceed with legislation that prohibits off-markets transfers of listed shares into a SMSF from July 1, 2013. Is this the case? Does that mean that for the current financial year shares can still be transferred to a SMSF at market prices?

Answer: It is my understanding that the legislation prohibiting off market in-specie transfers into an SMSF of listed shares did make its way into the House of Representatives and an amendment was made by the Opposition. Since then the legislation has not gone any further and therefore you should be able to transfer shares into your SMSF at market prices. It would however be advisable to check this fact with the accountant for your SMSF or its auditor.

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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