Tax with Max: Working out non-resident status

Avoiding a penalty for leaving Australia, clarifying pension payments, qualifying for the CSHC and more.

Summary: If trustees and members of an SMSF cease to be Australian residents, the ATO can take 48.5% of the assets of the fund. The ATO is often willing to work with such trustees to find a solution that avoids this penalty tax.

Key take-out: SMSF trustees who are planning to leave Australia permanently should seriously consider a public offer or industry fund.

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

Determining non-resident status

What tax rate will be applied to the earnings of an SMSF in pension phase if the trustees have declared themselves to be non-residents for tax purposes? How is the non-resident status determined, by declaration or time actually lived in Australia?

Answer: If the trustees and members of an SMSF are no longer residents of Australia the fund can be classed as non-complying and the Australian Taxation Office can take 48.5% of the total assets of the fund. Thankfully the ATO is often willing to work with trustees that find themselves in this situation so a solution can be found that avoids the penalty tax being imposed.

When trustees of an SMSF are planning to leave Australia permanently they should seriously consider converting their super fund investments to cash, looking for a public offer or industry fund that has sufficient investment options and low administration fees, and then rolling over the funds from the SMSF into this new fund.

Clarifying pension payments

You refer to a lump sum pension payment. I thought you took either a lump sum OR a pension payment. Is there any reason why this man cannot take the extra $150,000 as a pension payment on top of his current pension amount (see Tax with Max: Withdrawing a super lump sum)?

Answer: Account-based pensions can be taken either as a series of pension payments, as a lump sum pension payment, or as a combination of both. Under the current income test the amount counted by Centrelink is the amount of pension received less a deduction for the purchase price of the account-based pension. The purchase price is calculated by dividing the value of the pension when it started by the life expectancy of the member at that time.

If a lump sum pension payment is taken, especially of the magnitude of $150,000, this increases the likelihood of the member’s entitlement to the age pension being affected by the income test. For example if the member had received the minimum pension as a series of payments that totalled $40,000, and the purchase price of their pension was $30,000, that would result in $10,000 being counted under the income test.

Currently a single person can earn up to $4160 per annum and a couple can earn up to $7384 without their entitlement to the age pension being affected. If an extra $150,000 was taken by the member in the example that would result in $160,000 in income being counted. This would result in the member or members losing their age pension as the income threshold at which the age pension ceases is $47,985 for singles and $73,455 for couples.

If the $150,000 is anticipated and taken as a lump sum before December 31, 2014 this is achieved by ceasing the account-based pension, having the member’s account go back into accumulation phase, the $150,000 lump sum being taken, and a new account-based pension started before January 1, 2015. If this occurs only $10,000 of the account-based pension income would be counted – plus, if the $150,000 was not spent immediately and deposited into a bank account, the deemed income earned on the lump sum taken.

This means if super fund members find themselves in need of a lump sum after the new rules apply calculations will need to be done as to which of the alternatives affects the age pension entitlement the most. The alternatives will be taking a lump sum pension payment with the consequences as outlined above, stopping the pension and taking a lump sum payment with the deemed earning rates applying to the member’s superannuation balance, or taking a partial commutation of the pension account.

Qualifying for the CSHC

My wife and I are both retired, over 65 but do not qualify for any Centrelink pension, but we both have a Commonwealth Seniors Health Card.  Our SMSF is totally in pension mode, and we have been paying out all sorts of different pension amounts depending on what we needed to buy including a $65,000 caravan. After January 1, 2015 we were thinking of withdrawing another $80,000 or so to buy a 4X4. 

I have been told next year the income test for both the CSHC and the age pension is going to be the same. We were assuming none of our withdrawals would be treated as income even after January 1, 2015. Would we be better to put any money in accumulation phase into a pension phase before December 31, and take all these withdrawals as pension money even after January 1? Then if any further contributions are made, that would mean a new accumulation account would begin?

Answer: The income tests for the age pension and the Commonwealth Seniors Health Card differ now and they will still differ after January 1, 2015.

The age pension income test is currently made up of effectively three types of income. The first is actual income received that includes net business and rental income, net employment income after the work bonus, fringe benefits and amounts sacrificed as extra superannuation contributions, and distributions from trusts. The second type is deemed income which applies to all financial assets such as bank deposits, listed shares, managed investments, and loans.

The third type of income is adjusted actual income that relates to the current treatment of account-based pensions. Until December 31, 2014 the net amount of the account-based pension received, after allowing for the purchase price, is what is counted by Centrelink is income.

From January 1, 2015, for those people not covered by the grandfathering provisions of the new regulations, instead of the net account-based pension received being counted, the deeming rules will be applied to the member’s balance of their pension account.

In my previous answer, under the current income test, without a lump sum pension payment being taken, only $10,000 of the account-based pension was counted. If the member’s account balance was $500,000, and the couple deeming rates applied, $16,306 of deemed income would be counted.

The CSHC income test is currently based solely on a person or couple’s taxable income. Because account-based pensions for someone who is 60 or over is non-taxable income none is currently counted under this test.  From January 1, 2014 any new applicants for the CSHC will be assessed under the income test on their taxable income plus an income amount based on the deeming rates being applied to the value of their pension account.

You are right in saying that where a person currently holds the CSHC, taking lump sum pension payments will result in no change to their entitlement. However if the current account-based pension is ceased to take a lump sum, or as often happens an account-based pension is ceased, combined with an accumulation account, and a new account-based pension commenced, this would result in the new income rules applying.

Understanding account-based pensions

In your reply to a question you seem to say that the withdrawal of a substantial lump sum $150,000 results in the termination of an account-based pension (see Tax with Max: Withdrawing a super lump sum). Do I misunderstand what you are saying? My understanding is that an account-based pension is subject to statutory minimum withdrawal amounts but no maximum amount.

Answer: Where the lump sum is taken as an account-based pension payment the pension account continues. This does not cause a problem if the superannuation member only qualifies for the CSHC, but it can result in their entitlement to the age pension ceasing if a large lump sum account-based pension is taken.


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

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