MAPPING A PLAN FOR RETIREMENT
I have been self-employed since 1995 and went into a business partnership with my husband in 2000. I am 40 years old. We are renting and in about three years would like to buy our own home. We have no children. I have been putting between $50 to $100 away each week since 1995 in an ING savings account. In 1997 I invested $15,000 into a fund company called MFS, paying a 9 per cent return. Sadly, they liquidated and I lost the money, along with $25,000 of joint money with my husband. So at the moment I have $52,000 sitting in an ING account $21,000 is earning 6 per cent and $31,000 is earning 4.25 per cent. I don't have a super account. I am looking for a long-term plan for my retirement and some tax-free options for my savings. Finally, how do I find lost super? N.N.
A simple long-term plan is to aim to retire with a fully paid-off home, plus enough money to live on in retirement. You will probably need all your current savings for a deposit on a home and you should plan to buy one at a price you believe you can pay off in 25 years, that is, by age 65.
Once you have budgeted for family expenses and mortgage costs, place any excess into superannuation while aiming, if your business can afford it, to fully utilise the maximum limit of $25,000 a year each. Superannuation is a tax shelter where the income earned in the fund is taxed at 15 per cent, and capital gains taxed at 10 per cent, but it is not tax-free until you retire after age 60 and begin withdrawing benefits to live on. Set yourself a minimum target of $500,000 in super by retirement, but you will probably need more. To find lost super, Google "ATO SuperSeeker" or phone 13 28 65. Have your tax file number at hand.
INS AND OUTS OF CGT
Recently, one of your replies advised that when someone dies, a capital gains tax (CGT) arises on funds in a SMSF pension scheme if the pension is not reversionary or does not continue to pay a dependant. Does this mean, for CGT purposes, the cost base of inherited shares for beneficiaries is the value of the shares at the time of death, or does the cost base relate to the date of purchase? M.B.
The Tax Office's view is that, once a superannuation pensioner dies, the fund immediately becomes an accumulation fund, unless there is an automatic transfer to a dependant. The latter would occur if the pension is a reversionary pension - that is, it reverts to a tax dependant such as a spouse, child under 18, someone financially dependant on the deceased person or, if a binding death benefit nomination has been placed, in favour of a dependant.
The SMSF may only be an accumulation fund temporarily until the trustees decide to offer the death benefit to a tax dependant - say a wife or husband - or it may remain in the accumulation phase until it is wound up and the assets transferred to the deceased estate.
Once the fund becomes an accumulation fund, any income received is taxed. I'm not sure if the ATO would tax "income earned but not received" if the fund was temporarily in the accumulation phase. An example would be a term deposit that earns money but does not make an interest payment during such a period. I haven't heard that it does.
CGT becomes payable on any assets sold during the accumulation phase. The cost base of an asset bought after September 1985 would be the cost base at the date of death. So, for property it would be the costs of original purchase and eventual sale, plus any capital improvements in the interim. For shares it would be the purchase costs, including dividend reinvestments, and sale, all reduced by any tax-deferred income received.
An asset bought before September 20, 1985, would be free from CGT until the date of death, when it becomes a post-'85 asset with a cost base being the market value at the date of death. Of course, a residential property is free from CGT while it is a principal residence and can be sold within two years of the date of death without CGT, even if rented in the meantime.
LESSONS IN MOVING SUPER
I'm 52 and my husband is 51. We are both teachers and migrated to Melbourne in November 1999. We've decided to bring our British teachers' pensions over to VicSuper, which equals about $220,000 to $250,000 each. Will this be classified as a regular transfer? If so, it's massively over our $50,000-a-year limit and we'll have to pay a lot in tax. Or is there a way around this to minimise the tax bill? A.B.
VicSuper is accepted by British authorities as a "Qualified Recognised Overseas Pension Scheme" and is thus eligible to receive transfers from British pension funds.
Your benefit in your British fund at the time you immigrated is transferable into an Australian fund as a non-concessional contribution and subject to the non-concessional caps.
Since you are transferring the money to Australia more than six months after becoming a resident of Australia (or terminating one's foreign employment), you are subject to tax on the growth in the fund since then. This can be included in your personal assessable income, with tax payable at your marginal rate, or you can choose to include some or all of this "applicable fund earnings" as part of your super fund's assessable income. Since you are still working, the latter will result in lower-rate tax being paid, as the fund will pay 15 per cent tax. It will not be counted as part of your concessional contributions.
Remember, if you decide to move back to Britain within five tax years and become a British resident again, there are severe tax penalties - you should seek advice before doing so.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: Financial Ombudsman, 1300 780 808 pensions, 13 23 00.