Tax with Max: Why pension timing is everything

Timing transitions from accumulation to pension phase, deeming rules, and more.

Summary: Shifting a self-managed superannuation fund from accumulation to pension phase can be done prior to turning 60. Pension income received after the age of 60 will be tax-free. Therefore, pension payments can be withheld until the person receiving the pension has turned 60 so they can gain the tax-free benefits.
Key take-out: An account-based pension started at the beginning of a financial year will be deemed to have been in pension mode for that full year, even if the person owning the fund does not turn 60 until later in the financial year.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Timing the transition from accumulation to pension phase

I turn 60 on October 30, 2014. If I turn my SMSF from accumulation to pension phase on July 1, 2014 but draw no pension until after November 1, 2014, taking at least the full 4% between November 2014 and June 30, 2015, is it correct that the fund earnings would be tax-free as the fund would be in pension phase for the full 12 months, and the pension I receive would also be completely tax-free as all pension payments would be received after I have turned 60?

Would the conversion from accumulation to pension phase need to occur on the June 30, 2014 rather than July 1, 2014 for the fund to be tax-free on all earnings in the 2014-15 tax year? If a more tax-effective method of timing the transition from accumulation to pension phase is available, could you explain it please?

Answer: The tax treatment of an account-based pension received is decided by a person’s age on the date they receive the pension. As a result, account-based pension payments received by someone who is 60 or older are tax-free. This means what you are planning to do will result in the pension you receive being tax-free, your SMSF could be classed as being in pension phase for the whole year, and it would not pay income tax on income earned for that year.

You should not start the pension on June 30, 2014, as this would require you receiving a minimum pension payment for the 2014 tax year. You would be better to start an account-based pension on July 1, 2014, and have the pension payments to be made to you either half-yearly or yearly in arrears. By doing this you would receive your account-based pension payments after having turned 60, but your fund will have been in pension phase for the full year.

New deeming rules on account-based pensions

I have retired and started an allocated pension, but at 58 am still quite a few years off pensionable age. The Centrelink website suggests that although my allocated pension clearly pre-dates 2015, because I will not be an existing age pension recipient at that time my allocated pension will not be exempted from the new rules. I rang Centrelink only to be told that there “is an awareness of this issue, but advisors are yet to be briefed on the legislation”. The favourable treatment of allocated pensions was a factor in my pre-retirement decision to commute part of my defined benefit pension to a lump sum. Are you able to shed any further light?

Answer: Under the proposed change to the Centrelink income rules, for a person to be eligible for the current treatment of an account-based pension they must be receiving either the age pension or another form of income benefit from Centrelink as at January 1, 2015. This means that unless you commenced receiving an income benefit from Centrelink before January 1, 2015, such as New Start allowance or a disability pension, and remain on this benefit until being eligible for the age pension, you would be caught by the new deeming rules that will apply to an account-based pension.

Re-contributing back to super

Under what circumstances could and should a couple with an SMSF consider starting a pension, drawing lump sum payments and re-contributing them back?

Answer: Because taxable super that passes to non-dependent beneficiaries of a member upon their death has tax paid at 16.5%, superannuation members that are under 65 with all of their superannuation made up of taxable superannuation benefits should consider using the re-contribution strategy. Where a fund is already made up of a high percentage of tax-free benefits, and/or the members are over 65 and retired, there may be little advantage in using the re-contribution strategy. Before taking any action you should seek professional advice.

Tax planning on an investment property

My wife and I currently live in a townhouse, which we are in the process of converting to an investment property. We want to re-leverage this townhouse and use the debt to purchase another unit for investment purposes. This townhouse is jointly owned by myself and my wife. We want the new unit to be 99% owned by me, as I am on a higher income bracket, and 1% owned by wife.

In terms of interest deductions how will the increased debt in the townhouse be allocated between my wife and me? Also, we will need to reset the value of the townhouse for CGT purposes as it has been our principal place of residence. How current should the valuation be? If I have a valuation completed within three months of the townhouse being rented, is this acceptable for the ATO?

Answer: I am not sure why you want the property to be owned 99% by you and 1% by your wife. In this situation, you would receive 99% of the interest as a tax deduction and she would receive 1%.

As there is no real tax benefit that will be obtained by your wife retaining 1%, it would make more sense if you owned the property 100%. This will provide you with all of the negative gearing benefits related to the property. This does come at the cost of all of the capital gain being included in your taxable income when the property is sold. The tax payable on this gain can be reduced if it is sold when the only income you are receiving at that time is a tax-free pension from a superannuation fund.

With regard to you buying your wife out of her share of your current principal place of residence, the valuation will need to be done at the date the property is transferred. As far as when you actually have the valuation done this does not matter as valuers can assess a property at a specific point in time, and in some cases can establish the value of a property going back many years.

One thing you have not made clear in your question is what you will be doing with regards to a new home. If you are going to buy a new home, what you are planning does not really make sense from an income tax point of view. Your current property would have some built-up non-assessable capital gain equity that you will not get a benefit from.

If you are buying a new home it would make more sense to sell the current property, take the non-assessable net proceeds and use this to maximise the equity in your new home. You would then use the equity in this property to raise a loan to purchase a new investment property that is 100% geared. As you have a number of alternatives you should seek professional advice before taking any action.


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