Tax with Max: Understanding pension deeming rules

The incoming pension deeming rules, qualifying pension streams, unit trusts and SMSF property.

Summary: New account-based pension rules will come into effect from January 1, 2015. From then, those starting an account-based pension will have the value of their superannuation account tested under the deeming rules for the income test.

Key take-out: For a person to have the existing rules apply they must be in receipt of an income benefit from Centrelink and have commenced an account-based pension before the new rules come into effect.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Understanding the new pension deeming rules

As far as I can tell from the Centrelink website, super fund assets are counted for the assets test if they are accessible, and therefore subject to deeming at 2% on the first $38,700 each for a couple and 3.5% above that. Can you please explain in detail what is changing on December 31?

Answer: The current asset and income test rules that apply to superannuation accounts differ, depending on the age of a person and whether their superannuation fund is in accumulation phase or pension phase. Anyone who is under age pension age, and is not receiving a pension from their superannuation fund, is not affected by either the assets or the income test.

If someone is under age pension age and receiving a pension from their super fund, and their spouse is eligible to receive the age pension, the value of their superannuation is counted under the assets test. In addition, a net pension income amount is counted by Centrelink under the income test.

For someone that is of age pension age and has a pension account that is in accumulation phase the value of their superannuation is counted under the assets test, and this value has the deeming rates applied to it. If the superannuation account is in pension phase the value of the account is counted under the assets test and net pension income received is counted under the income test.

The net pension amount counted by Centrelink is calculated by deducting a purchase price from the pension amount received. The annual deductible purchase price is calculated at the time the pension commences by dividing the value of the superannuation account by the member’s life expectancy.

As a result of the Abbott Government adopting the previous Labor Party policy, anyone that starts an account-based pension after January 1, 2015 will have the value of that superannuation account tested under the deeming rules for the income test. For a person to have the existing rules apply they must be in receipt of an income benefit from Centrelink and have commenced an account-based pension before January 1, 2015.

The ATO’s rules on pension income streams

In previous years a pension has been drawn in one payment in June from my SMSF, which is in full pension mode. I am now told by my accountant that this practice does not comply with an ATO tax ruling as to when a super income stream exists. According to the ruling and my accountant, a liability to make a single payment for one year is not a series of payments and will not satisfy the requirements of being a super income stream.

The SMSF industry is now apparently recommending at least three payments be made to satisfy that a series of payments are made. Can you confirm the need for a series of payments and whether they need to be equal and equally spaced? What penalties could be applied to those not conforming with this advice? This is of concern to people who will soon be drawing down pensions from SMSFs.

Answer: I believe that your accountant is ignoring the fact that you have been receiving a pension for a number of years, and as a result this pension account has already been made up of a series of annual payments. My understanding is that it does not matter that these payments are made annually, as long as there are a series of them. For this reason, I do not think you will be in breach of any of the relevant rules and therefore no penalty should apply.

The only time that taking an annual pension payment could be a problem is in the first year a pension is commenced, and the member dies before they receive the payment. In this case, as there has not been a series of payments, the ATO may be successful in arguing that a pension has not been commenced.

Unit trusts and SMSF property

This year I will be 70 and my wife 65. We are both working part-time for 300 to 600 hours per year. Our home of 17 years is owned by a family property trust, with the beneficiaries being one-third myself and two-thirds our SMSF. If we can vest the trust and transfer the property to our personal names, we will be eligible for a part-pension.

I propose to transfer my share of the trust to the SMSF as an in-specie personal contribution, and then transfer the property from the trust to my wife and via in-specie lump sum. The SMSF is in pension phase and is tax exempt. Would there be any tax payable by myself with this arrangement?

Answer: The only way that your superannuation fund could have a two-thirds ownership of your home would be if it had been owned by a unit trust. Under income tax and capital gains tax rules no benefit would be achieved in transferring your one-third of the units to the superannuation fund.

This is because at the time you transferred the units they would have a capital value of more than what you paid for them. This would result in you making an assessable capital gain at the time you transfer the units to your superannuation fund. In addition your super fund would have as its purchase cost the same value that it would receive when the property was transferred to your wife.

The taxation and superannuation law dealing with these types of unit trusts, that enabled a superannuation fund to effectively own a home that the members lived in, is old and very complex. Depending on where the property is there could also be some major stamp duty costs due to what you are planning to do. You should seek professional advice from someone who specialises in these areas before taking any action.

Transferring properties and state stamp duties

Last September my brother and I appointed a corporate trustee, with us as directors together with our wives, who are not fund members but reversionary pensioners who would become members on our deaths. As there are seven commercial properties in the fund they needed to be transferred to the new corporate trustee.

To this date the only property transferred is one in South Australia. The one in Queensland is still held up with bureaucracy and the five in Western Australia are still in the Titles Office after being passed by the Stamp Duties Office at nominal duty.

I would like it known that every state has different procedures to have properties transferred with nominal stamp duty, with complicated administration. When handled by experts, which we have used, it is expensive. It is about time that all states should accept title of real property in the name of a trust or trusts or an SMSF. What can be done to make it easier to do these transfers?

Answer: I can understand your frustration with what you have been put through in what should be a simple matter of changing the trustee of your SMSF. I know that the same problem can occur when the trustee of a discretionary trust or a unit trust is changed.

Unfortunately one of the things that cannot be addressed by the current inquiry into Australia's financial system is the problem that you have highlighted. Because Australia is a federation of states, and all of the states vigorously protect their current rights and taxing sources, I cannot see this problem being resolved any time in the future.

My feeling of hopelessness for this bureaucratic nightmare is reinforced by the fact that when the GST was introduced many of the state charges that still exist to this day were supposed to have been scrapped. Apart from making representations to your federal member, or praying to whatever deity that you believe in, there is not much more that I can suggest.


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