SMSF to industry fund
As we get older my wife and I are thinking about what to do longer term about our SMSF. Accordingly we have decided to rollover some of our SMSF into an industry super fund, with the idea that ultimately we may move the whole fund to this option.
If we decide to do this, how is this documented and what actions need to be taken? If we rollover money from an existing pension of the SMSF to an industry super fund, will the SMSF pension cease and have to be restarted, or will the SMSF pension simply be reduced by the rollover amount?
Answer: There are a number of things someone should consider before rolling the funds they have in an SMSF into an industry fund. In this case, if a couple are both receiving account based pensions and the age pension and this commenced before January 1, 2015, there could be disadvantages by rolling over into the industry fund.
This is because the existing account based pensions would be covered by the old income rules, which resulted in the amount of account based pension received being reduced by a purchase price. The revised income test rules would apply the new account based pension where the value of the account is deemed to earn income at the deeming rates.
If you are not receiving the age pension, and are concerned about the amount of work and worry involved with continuing with an SMSF, it can make sense to over time roll all of the funds in an SMSF into an industry fund that will pay an account based pension.
The first part of this process should involve selling investments while the fund is still in pension phase. If the sale of investments are done after the pensions have been commuted, income tax would be payable on any capital gains made. By selling the investments while the fund is still in pension phase no income tax will be paid.
Once sufficient cash has been produced to be rolled into the industry fund, and in this situation someone is planning on keeping an SMSF going because some investments are unable to be converted to cash just yet, they would partially commute the existing account-based pensions back into accumulation phase.
The documentation required for this would be letters from the individuals as members, stating that they wanted to partially commute their account based pensions back into accumulation phase, and that they wanted to roll over these accumulation accounts to an industry super fund that they would specify.
There would then need to be a resolution or minute by the Trustees documenting the members’ request to commute their pensions back into accumulation, with the trustee agreeing to the request.
From an accounting point of view, if the commutation was not occurring on June 30 of a financial year, there would need to be a set of accounts for the super fund drawn up as at the date of the commutation so that the members’ balances can be calculated.
The industry fund would also need to be contacted to find out what documentation they require to give effect to the rollover. One of the forms that they will require is a rollover statement that must be prepared by the SMSF. This statement will provide the industry fund with details of the components making up the rollover. This will more than likely be a breakup of the rollover amount between taxable and tax-free benefits.
Income test grandfathering eligibility
I have an Account Based Pension that commenced in 2008. From something you wrote recently, I assume that I can get a deduction for the purchase price of the Pension Account. If I had commenced an ABP after the January 1 2015, I realise that my Pension Account would be fully deemed.
Currently I draw an ABP of $39,000 per annum. So with my ABP balance of $500,000 my deduction would be $26,968 ie. ($50,0000 ÷ 18.54). This results in $12,032 being assessable income. On the Centrelink website, the Age Pension calculator gives a nil benefit.
In the calculator I included my personal assets of $72,254 and the $1,500 fortnightly income stream income and my super balance of $500,000. It looks like they have not included the deduction. So you can see my confusion. The grandfathering provision should apply in my case as I have commenced my ABP well before January 1 2015.
Answer: When they changed the income test for the age pension from January 1, 2015, there were grandfathering provisions included to protect people who were receiving the age pension at that time.
To benefit from the grandfathering provisions a person had to be receiving an ABP that commenced prior to January 1, 2015, and they must have also been receiving an age pension on that date.
If you have only just reached 65 and are in the process of applying for an age pension now, although someone in this position met the first part of the requirement for the grandfathering provisions by being in receipt of an ABP since 2008, as they were not receiving the age pension on January 1, 2015 the grandfathering provisions do not apply to those in these circumstances.
Care should be taken when using calculators on any of the websites. On my calculation, with a single person being eligible for the age pension as long as their income is less than $49,926 a year, and for a couple with income combined of less than $75,452, if the deemed income from a superannuation account is $15,530 a year, unless there are a lot more financial assets outside of superannuation, an individual should be eligible for the age pension.
The only other reason that someone with the situation described above would not qualify for the age pension is if their assets counted under the assets test are worth more than $783,500 for a single, or $1,163,000 for someone with a partner.
Property purchase with two SMSFs
We are about to embark on the purchase of a commercial property with our SMSF and another parties’ SMSF. This property is and will be leased to a tenant that is not related to either SMSF or any Trustee/ Directors of either SMSF.
We are planning to set up a structure using a unit trust that owns the commercial property with each of the two SMSFs, which have a corporate trustee, owning 50 per cent of the issued units. One of the SMSFs would like to, at some stage in the future, sell its share in the property to the other SMSF. Can this be done, or would the remaining SMSF be considered to be related to the Unit Trust?
Answer: The options for two SMSFs buying the commercial property include using a partnership of the SMSFs buying the property, with each holding a 50 per cent ownership.
If the partnership approach was used and one SMSF bought out the other’s interest in the property, stamp duty would payable at that point, plus in addition capital gains tax may be payable depending on whether the SMSF is in pension phase.
If a unit trust approach was used, there would be nothing stopping one SMSF buying out the units owned by the other, as there are no borrowings involved in the purchase of the property. There would again be a capital gains tax event but I am unsure as to whether stamp duty would payable on the sale of the units.
Because stamp duty is levied on a state by state, basis, when looking into this SMSF holders should check with a lawyer as to whether a unit trust may be a better structure, because stamp duty may not be payable upon the sale of units.
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