Tax with Max: Starting a pension before age 60

Starting a super pension

I am 56 and the sole member in an SMSF. I was made redundant in 2012 and have existed on my personal funds that have been dwindling. I have not worked since and have retired, and I have made no further contributions since ending my last employment. The SMSF is still in accumulation phase.

The funds in the SMSF are totally made up of amounts from rollovers and concessional contributions. I know what documentation needs to be drawn up to start a pension within my SMSF but need assistance with the following questions:

1. What percentage of the fund's balance is a member allowed to access as a pension per annum?
2. As the pension is made up of taxable benefits will this require the SMSF to register for PAYG withholding tax and deduct tax from the pension paid to me?
3. If the member derives no other income and therefore will not be paying tax on the superannuation pension received, will tax have to be deducted by the fund?
4. How does the member report the pension in their individual tax return?
5. Does the SMSF still have to pay 15% tax on its net income?
6. Is it possible to close the super fund and transfer the assets to the member's personal bank account before or at age 60?

Answer: There is no limit on the amount of a member's accumulation account that can be converted to pension phase. There is however a minimum pension payment that must be paid on a superannuation pension account depending on the member's age. For anyone under 65 the minimum pension that must be taken is 4% of their superannuation account balance.

When a member under 60 starts a pension it is always best practice for an SMSF to register as a PAYG withholder. The amount of tax that must be deducted by the super fund will depend on the value of the pension being taken.

For someone who is under 60 years of age, the pension they receive from taxable superannuation benefits must be included as assessable income on their tax return. Tax is paid on this income at the relevant marginal tax rate but they will receive a 15% tax offset to reduce the final tax payable. This means someone under 60 can receive an account-based pension of just under $50,000 and after the tax offset not pay any income tax. They would however more than likely have to pay the 2% Medicare levy.

As the SMSF would be registered as a PAYG withholding payer it would need to issue the member with a PAYG withholding summary for the financial year they receive the pension. This summary would show how much pension was paid and how much tax was deducted. The details on this summary would need to be included on the member's tax return.

When a superannuation account is in pension phase the 15% tax is not paid on any income generated to fund the pension.

For someone who has retired, which means that they do not intend to work more than 10 hours a week, they have met the retirement condition of release and can access their superannuation. The problem for someone under 60 is that any lump sum taken will be taxed at 15% on the excess over $185,000.

There are a number of strategies open to you that you should consider before taking any action. Also it does not make sense, given the tax advantages of having retirement investments in superannuation, to withdraw all of the funds in an SMSF. You should seek advice from a person that specialises in tax and SMSF strategy.

Buying a car

I earn approximately $180,000 per annum and was wondering if I should buy a car via salary sacrifice under novated lease arrangement or put it in super. What are the things I should consider? 

Answer: The Fringe Benefits Tax regulations are some of the most complicated areas of income tax legislation. Also as a result of changes made to car fringe benefits in the May 2011 federal budget the tax benefits of having a car provided through a novated lease have been effectively extinguished for most people.

When the FBT system was introduced the amount payable on car fringe benefits was based on the private use component of the motor vehicle. One way of calculating the private use component was to keep a log book for 12 weeks that established what the private use percentage was. The total running costs for the car were multiplied by the private use percentage to arrive at the taxable benefit.

Another way to establish the private use component is called the statutory method. Under this method the value of the motor vehicle purchased is multiplied by a percentage that differs depending on the number of kilometres travelled in a year. The fewer the kilometres travelled, the higher the percentage.

Until the changes made in May 2011 the highest percentage was 26% for cars that travelled less than 15,000 kilometres a year, with the lowest being 7% for vehicles that travelled 40,000 or more kilometres a year. As a result of the change, cars purchased after May 2011 have one statutory rate of 20% no matter how many kilometres are travelled.

Another problem with packaging a motor vehicle using the FBT system is that for someone who is earning $180,000 per annum, the marginal tax rate paid on salary between $80,000 and $180,000 is 39%. Packaging a car using the FBT system can be an advantage for people who earn more than $180,000 a year as they pay the top marginal tax rate of 49%, which is also the tax rate payable under the FBT system.

A further problem with someone in this situation packaging a motor vehicle is that once the private use component is established it is multiplied by 2.06472 to arrive at the amount taxed at the top marginal rate. If they instead decided to sacrifice some of their salary as extra superannuation contributions they would receive a tax benefit as the contributions would be taxed at 15% rather than the 39% payable on the salary.

As I said, the FBT system is very complicated and there can be benefits in packaging motor vehicles because of the GST saving on the purchase price, and when an employee pays for the value of their private usage. You should seek professional advice to have your situation reviewed to establish what will produce the best after-tax result.

Deducting interest on a loan

I recently purchased an investment property with a loan funding all of the purchase costs. I put the property on the market for rent but it was vacant for two months before I found a tenant. Is the interest I paid during these two months tax deductible?

Answer: The basis for claiming interest on a loan to purchase an investment property is when the property is available for rent, rather than the interest being deductible only once the property is rented. This means investors can claim the interest on the loan while a property was vacant plus any of the other holding costs, such as rates and advertising, from the date of purchase rather than from when the property was rented.

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