Tax with Max: Withdrawing a super lump sum

Taking cash out of an SMSF, keeping the Commonwealth Seniors Health Card, paying CGT after a demolition and more.

Summary: SMSF trustees who wish to withdraw a lump sum for house renovations, cars, holidays and other one-off large costs may be considering the upcoming changes to the age pension. The income test will change from January 1, 2015. If a lump sum is taken after December 31, 2014 it is likely that the age pension received will decrease or stop.

Key take-out: Large lump sums needed over the next two to three years should be taken before December 31, 2014. This means a new account-based pension will commence, the grandfathering provisions will apply and the entitlement to the age pension will be maximised.

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

Withdrawing a lump sum from an SMSF

My wife and I are both receiving a small age pension from Centrelink and I am also drawing a pension from our SMSF. Withdrawals from the SMSF are irregular due to dividends and franking credits. I wish to withdraw about $150,000 extra from our SMSF to purchase a car and caravan. Can I do this without impacting the age pension? 

I believe the timing for withdrawing the money, and the type of lump sum, could create some problems with us qualifying for the age pension. What might also be the impact on the Centrelink grandfathering provisions?

Answer: You have raised a very good point when it comes to the grandfathering provisions as a result of the income test changing from January 1, 2015. The timing of taking the lump sum will be critical. If the lump sum is taken after December 31, 2014 there is a high likelihood that the age pension received will either decrease dramatically or cease altogether.

If the $150,000 required for a car and caravan were taken next calendar year as a lump sum pension payment, this would result in the age pension being lost because the $150,000 would be treated as income for the 2015 year.

If the $150,000 were taken as a lump sum after December 31, 2014 this would result in the current account-based pension ceasing, the lump sum payment would come from an account in accumulation phase, and then a new account-based pension would be commenced. Depending on the account balance when the deeming rates are applied this could result in a higher level of income being counted than is currently under the grandfathered income test.

I have been advising our clients that they need to look ahead for the next two to three years and anticipate any large amounts they will require either for house renovations, cars, holidays, and other one-off large costs. Once the total required has been calculated this should be taken before December 31, 2014.

By taking the lump sum prior to the introduction of the new income tests, this will result in the current account-based pension ceasing, the lump sum being taken, and a new account-based pension commencing before December 31, 2014. This will mean the grandfathering provisions apply and the entitlement to the age pension is maximised.

Keeping the Commonwealth Seniors Health Card

We are a retired couple that both currently qualify for the Commonwealth Seniors Health Card as our income is made up of an $80,000 account-based pension.  Under the yet to emerge changes to the CSHC when one partner dies does the reversionary pension trigger a change such that deeming will then occur, resulting in the possible loss of the CSHC privilege?

Answer: The legislation relating to the change to the income test for the CSHC has finally passed both Houses of Parliament and received royal assent. Under the grandfathering provisions included in the legislation, anyone receiving a CSHC at December 31, 2014, that is receiving an account-based pension not counted under the current income test, will continue to qualify for the card.

The grandfathering provisions included in the legislation also apply in the situation you have outlined. Where the account-based pension will revert automatically to the surviving spouse, and the trustee has no discretion as to how the pension will be dealt with, it will meet the requirements of the legislation and the account-based pension would still continue to be grandfathered and the CSHC retained.

For this reason it is vitally important if anyone currently qualifies for a CSHC as a result of receiving an account-based pension, and the pension is currently non-reversionary, they should convert it to a reversionary pension prior to December 31, 2014. If this is not done, given that the income test for a single person to qualify for the CSHC is $51,500, it increases the likelihood of the surviving spouse no longer qualifying for the card upon the death of their partner.

Qualifying for the CSHC

My wife is a sole trader with a small business and I am an employee. Can you tell me if there is anything we can do to reduce our income this financial year so that we qualify for a CSHC before the new deeming rules apply? Our business will close within 18 months and it seems unfortunate to just miss out qualifying for the CSHC.

Answer: Without knowing what the combined income of you and your wife is, based on the salary you are earning and the profit from her business, it is hard to provide a definite answer. If you are missing out on the CSHC by only a small amount it may be worthwhile your wife making a tax-deductible donation to bring the combined income below the income threshold.

Another possible course of action would be to set up a company immediately that would take over the business. You would then take little or no salaries from the company that so that your income earned so far, but excluding the current non-taxable account-based pension income, meant you are below the income threshold.

Profits earned in the company would have company tax paid. The company would be operated until the business was sold. You and your wife would then commence a dividend stream from the company. Before taking any action you should seek professional advice to make sure that the benefits of securing the CSHC are not exceeded by the costs of any action you take.

Paying capital gains tax after a demolition

If I purchased a property and lived in it for 12 months, then demolished it and built two new units and sold them, what are the capital gains tax implications? Does one of the units receive the capital gains tax exemption and what would the cost base be?

Answer: By not living in one of the units and instead shifting to a new property that became your residence, capital gains tax would be payable on the profit of both of the units. This would be calculated by deduction from the selling values the cost of construction of the new units and the value of the property when you shifted out.

The best course of action to avoid this capital gains tax problem, depending on the size of the property and the placement of the current structure, would be to build a new unit on the property and shift into it once completed. The residence that someone in this situation had been living in could then be sold and qualify for the capital gains tax exemption, and as long as they lived for a reasonable time in the new unit it would also qualify for the capital gains tax exemption.

If it is not possible to build a new unit while retaining the current structure it would make sense to at least shift into one of the units after they are completed and live there for a reasonable period of time. It would then be possible to sell that unit and receive the capital gains tax exemption.

Capital gains tax payable on the other unit would calculated by subtracting from the sale proceeds the half share of the original purchase price of the property and its construction costs. Given the complexities of the capital gains tax legislation 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