Tax with Max: Weighing up SMSF tax benefits

Weighing up the tax benefits of a SMSF

I am a single person with no heirs and am close to pension age. I was wondering what the benefit would be of transferring a shareholding of $450,000 with $250,000 of capital gains into a superannuation fund? I am concerned about the capital gains tax and set-up fees for an SMSF. With the potential increase of the tax threshold to $18,000 I am assuming my taxable liability on share earnings of say $30,000 per annum grossed up would be minimal versus the SMSF costs and CGT costs.

It will cost you approximately $1,500 to set up a self-managed super fund with a company to act as trustee. If you have a full-service accounting firm look after the SMSF the annual cost would be approximately $2,200 a year. There are cheaper options for setting up and maintaining an SMSF but there are often restrictions placed on what you can invest in.

You are correct about not paying much tax due to the $18,200 tax-free limit. The actual limit is extended by the low income tax offset, so that it is slightly over $20,000. The problem is once that you start receiving the age pension this is added to your other income such as the dividends you receive.

On the basis of the assets test you would be receiving an age pension of approximately $9,500. This would result in a taxable income, including the imputation credits, of $39,500. Tax payable on this income is $5,031, and after taking account of $9,000 worth of imputation credits, you would receive a tax refund of $3,969.

If you instead had the shares in your SMSF your only taxable income would be the age pension. This would result in no income tax being payable by you, and your SMSF would receive a full refund of the $9,000 imputation credits.

There are many things to take into consideration as to whether you should actually have an SMSF. These include:

• The capital gains tax payable,
• Ways of decreasing the tax on the capital gains, and
• The total overall benefit from an income tax point of view.

On the balance of things the benefit of having an SMSF would more than likely be less than the capital gains tax you would be paying. Before making a decision you should seek professional advice so that more accurate calculations can be done.

Avoiding the Division 293 tax

The so-called social justice measure “Division 293” was not planned to raise a significant amount of tax revenue. It is based on charging an extra tax of 15% on concessional contributions for very high income earners. High income earners contributing to uncapped untaxed funds now face a large tax bill that significantly erodes the final benefits that accrue in these funds. Are there any ways to legitimately reduce this added tax, apart from the obvious of reducing income or reducing contributions?

There is unfortunately no way that I know of that this new Division 293 tax can be avoided for high income earners. Even traditional methods of reducing a person’s taxable income, such as negatively gearing an investment, do not work as the income counted for the Division 293 tax takes account of negative gearing losses.

Rolling business proceeds into a SMSF

My wife and I have just sold our small business for $1.8 million; we are both over 65 and retiring.

Can we put most of this into our SMSF on top of the normal $150,000 non-concessional and $35,000 concessional contributions? I am being told there is some kind of concession that allows this, but we would need to be sure in order not to over-contribute. We do meet the work test for this year?

Under the small business capital gains tax concession system there is the ability to have large amounts rolled into a superannuation fund that are not counted in the concessional or non-concessional contribution caps. To qualify for the small business concessions the turnover of the business must be less than $2 million a year, or the total net asset value of the taxpayers receiving the concessions must be less than $6 million.

If you qualify for these concessions you are able to roll up to 50% of the capital gain made on active assets into your superannuation fund under the retirement exemption. This exemption has a lifetime limit of $500,000 per taxpayer. Active assets are those that were used in relation to the running of the business, which includes land and buildings, and also the value received for selling goodwill.

Before taking any action in relation to availing yourself of the small business CGT concessions you should seek professional advice.

Is it possible to find a way to contribute to super after 75?

Unfortunately once a person reaches the age of 75, the only way that further super contributions can be made is when they are compulsory employer contributions.

Capital gains tax on shares inherited by a minor

My daughter is a minor and was given some shares from her grandfather’s will some years ago.  The shares are held in the names of my wife and I, as trustees for our daughter.  We would like to sell some of the shares but do not understand the capital gains tax implications. Could you explain who is responsible for declaring any gain?

As they are held in trust for your daughter the capital gain will be regarded as her income. Under normal circumstances income distributed to minors, in other words anyone under 18 years of age, pays a penalty rate of tax. One of the only exceptions to this rule is when the trust is a testamentary trust.

A testamentary trust is a trust established by a will. From what you have described the shares held by you and your wife on your daughter’s behalf resulted from her grandfather’s will. This should therefore mean that the trust qualifies as a testamentary trust.

When income is distributed to a minor from a testamentary trust it is taxed under normal taxation rules. In other words, the capital gain distributed to your daughter on the sale of the shares would be taxed as if she was an adult tax payer and should receive the full benefit of the tax-free threshold of $18,200.

Assets levels to qualify for the age pension

I was born on April 16, 1952 and my husband was born on December 5, 1949. Our plan is to retire next year in December when my husband reaches 65 and I will be 62.5. We have a house which is under $500,000, $100,000 in the savings account, approximately $150,000 in a superannuation fund, and some shares worth $20,000. Are we able to receive the age pension from Centrelink?

Your husband should be eligible to receive the age pension when he turns 65, but this will depend on not only the assets test but the income test as well. If you are both not working when he retires after turning 65 the effect of the income test on the amount of pension that your husband receives will not be great. After taking into account the value of your cars and your household possessions there is likely to be a small drop in the age pension your husband would receive because of the assets test.

You should seek professional advice about steps you can take before your husband turns 65 that could result in him receiving the full age pension.

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