Tax with Max: Transition to retirement pensions

Tax benefits on TTR pensions, company tax and property, Australian residency and tax, death benefit nominations, and more.

Summary: The main benefit from a super fund paying a pension is that no tax is paid on the income generated to fund the pension. This effectively means that the income return for the fund paying a pension is 15% higher.

Key take-out: Pensions received by someone under 60 are taxed at their applicable marginal tax rate, but they receive a 15% tax offset that effectively decreases the tax payable.

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

The tax benefits of transition to retirement pensions

I am 57, working part-time, and contemplating converting part of my superannuation fund into pension mode. The reason behind this is the fund will earn approximately 1% higher in pension than in income mode. I would then increase my own salary-sacrifice contributions to ensure no reduction in my super. However, I have been advised that any pension from superannuation would be taxable until I reach 60, making this strategy unattractive. Is this correct?

Answer: I am not sure why you think there is a 1% higher return when a superannuation fund is in pension mode. The main benefit from a super fund paying a pension is that no tax is paid on the income generated to fund the pension. This effectively means that the income return for the fund paying a pension is 15% higher.

The tax benefit of starting a pension from a super fund is reduced when someone is under 60 years of age. Pensions received by someone under 60 are taxed at their applicable marginal tax rate, but they receive a 15% tax offset that effectively decreases the tax payable.

Whether you would be better off by starting a Transition To Retirement pension with your super fund depends on the earning rate of your fund, the amount of pension you will be taking, how much you salary sacrifice, and whether there would be an increase in administration costs for the fund once it is in pension phase. An increase in administration costs will occur in most cases, whether you are in an industry fund, a commercial fund or have an SMSF.

On the basis of your super fund earning 6%, paying you a minimum pension at 4%, and salary sacrificing an amount equal in salary to what you would be producing from the after-tax TTR pension you would be receiving, your superannuation account would be better off in nearly all circumstances. This does not take into account any increase in administration costs.

For example, if you have a super balance of $200,000 you would receive a TTR pension of $8,000, at the 39% tax rate; after the 15% tax offset, you would receive $6,080. At the 39% tax rate this after-tax pension amount is equal to a salary sacrifice amount of $9,967, resulting in an after-tax contribution received by the fund of $8,472.

On this basis your superannuation balance would be better off by a combination of an $1,800 tax saving on the $12,000 of income it earned, that would have been payable had it not been paying a pension, plus the $472 difference between the pension paid and the after tax salary sacrifice amount it receives.

Is company tax payable on a property owned within a super fund?

Do property trusts set up as companies pay post company tax dividends, or do they distribute profits in a way that does not involve company tax. For example if I purchased a property direct within my super fund in pension phase for $1 million, and received $50,000 per annum rent, then I assume no company tax is involved. Therefore all rent and future capital gain would be tax free and the company tax/franking credit problem would be averted. If this applies to property trusts it would be easier than direct property.

Answer: With regard to an investment vehicle owning a property, you either have a trust own the property or a company own the property. A trust cannot be taxed as a company and therefore its distribution of net rent would not have any company tax paid on it. For a superannuation fund that is paying a pension the after-tax result of a property investment does not change, whether the super fund makes the investment directly, or the investment is made via a trust or a company.

How is Australian residency determined for tax purposes?

I am a UK born Australian citizen who left Australia with my wife in 1997 and subsequently spent seven years in the UK followed by nine years in the Arabian Gulf. On being made redundant and having to leave Dubai because of visa cancellation, we opted to return to Australia to minimise the disruption to our teenage high school children and arrived in Sydney on June 29, 2013.

I subsequently tried to get freelance work and eventually started an interim management job back in Dubai last November. I have now accepted a full-time role commencing July 3 for four to six years in Dubai. However, because of the need to avoid disruption to our kids schooling my wife and kids will have to stay in Australia and we will visit each other during the year.

I have been in Australia for more than 183 days this year, but will be a lot less than this over the next four to six years. What is my residency situation this current year and the next six years?

Answer: The tax residency of an individual is based on many things including a person's intention. The number of days spent in Australia is the first test applied, but it is by no means the overall deciding factor. One of the major determinants of a person's residency for tax purposes is where their home is.

In your case if you purchased a residence for your wife and children to live in Australia, you live in rented accommodation in Dubai while working there, and intend to eventually resettle in Australia and therefore will take up residence in the home occupied by your wife and children, there is a high likelihood you would be classed as an Australian resident for tax purposes and pay Australian tax on all of your worldwide income.

If on the other hand you rented a house for your wife and children to live in Australia, you purchase a home in Dubai which you regarded as your home, and eventually your wife joined you and lived with you in Dubai, there is a high likelihood that you would not be classed as an Australian resident for income tax purposes and would only pay Australian income tax on Australian derived income.

This is a very complicated area of income tax legislation and you should seek professional advice before taking any action.

Is it necessary to have secondary binding death benefit nominations?

My wife and I have a super fund with binding nominations for each other in the event of our demise. Should we fall off the perch together, is it possible for us to also have binding nominations for our children and or our grandchildren as well?

Answer: The only point of having binding death benefit nominations to cover the situation where both of you died at the same time would be if you wanted the distribution of your superannuation to be handled differently to how the rest of your estate would be distributed. If this is not the case I can see no benefit in putting in place binding death benefit nominations to cover you both dying at the same time.

Calculating maximum non-concessional contribution amounts

Could you please clarify a query I have in relation to non-concessional contributions?  My recent non-concessional contributions have been, $240,807 for 2011, $60,959 for 2012, and $67,357 for 2013. I turn 65 during October 2014, am not working and wanted to know what was the maximum I was allowed to contribute for the 2014 year and how much I can contribute for the 2015 year?

Answer: You would have been able to contribute up to $150,000 for the 2014 year and will be able to contribute up to $540,000 before you turn 65 in October. If you don't make the super contribution until after you turn 65 you would need to meet the 40 hour work test for the 2015 year to make the $540,000 contribution.


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