SMSF Q&A: 13 August 2020

Hello, and welcome to today's episode of Ask Olivia. I'm Eureka Report’s SMSF coach, and also the Managing Director of SMSF at Prime Financial Group. Remember that my answers today will be general advice only, so they may not be appropriate or right for you. If you have any questions for either Alan or myself, feel free to submit them to the Q&A section of the Eureka Report website and Alan will answer them in a few weeks’ time and I'll answer them next month.

We're starting today with a question from Michael. He says: Hi Olivia, last month you discussed the tax obligations, eventually payable for capital gains tax, even when in pension mode, when no tax is normally paid. Can you expand on how this works, please?

Michael, as I mentioned last month, despite being in full pension mode as accountants, we still track the capital gains and losses for a member's account because certain information is required to be reported to the ATO each year in the annual return and this aides them in the overall modelling of the sector. That's a very brief explanation of why it's still important for us to do that.

Erin says: I am 55 on JobSeeker, I have a mortgage, not yet on payment holiday, and may be forced into a home sale after 30 plus years of full time work. I am grinding my teeth, remembering the introduction of the delayed preservation age. Then I read the recent Productivity Commission report that links young people's low income to a labour market oversupply of older Australians due to delayed superannuation preservation dates and aged pension. I'd be happier and safer retired if I could get full access to super, which would give younger folks a better chance at the real jobs. Do you think it would make sense for the government to bring forward the preservation age?

Firstly Erin, I'm really sorry to hear that you're being forced into a home sale. I know a number of people who were in that position at the moment, which is awful. Look, I absolutely concur with you. It makes total sense for the government to bring forward the preservation age. Unfortunately, we expect that the government are likely to continue to increase the preservation age as our lifespan increases. Having said that, however, we are, as everyone is commenting, in complete unprecedented times, so who knows what changes the government may or may not make in the coming months or years to deal with the current crisis that we're all coping with.

John says: I have a property outside of my SMSF with no security on it. Can I take an equity loan against the property to fund my SMSF and then use the interest to negative gear against my other properties outside my SMSF?

Hi, John. This is more of a tax question, but the answer is yes, you can decide to take out an equity loan on the property and make non concessional contributions into an SMSF up to the contribution caps. Unfortunately though, you will not be able to claim a personal tax deduction for the ongoing interest as any interest claims need to be in direct connection with income earned. So making a personal super contribution doesn't satisfy this requirement, but this is something that I'd recommend you have a chat with your personal accountant about.

Moving on, and Max says: Hi Olivia, my parents had an SMSF. So despite both of them being long retired and requested to do so, the accountant refused to put any of the assets into pension mode. As a result, if I'm not mistaken, they paid a lot more tax than they should have. Is it possible to recover this tax, whether by submitting amended tax returns or some other means, or is that money lost?

Hi Max, in 16 years of working in SMSF I've only ever heard of an accountant once that didn't know how to put a fund into pension mode. An accountant has absolutely no grounds whatsoever to refuse to establish a pension for an SMSF member, once they satisfy a condition of release. Given I now understand that the fund has actually been wound up, given that you said they had an SMSF, you can't actually go back and rectify the situation. In fact, if the fund still exists, you can't go back and amend prior returns when it comes to pensions. But you do have a few avenues of retribution here, and I'd really like you to give me a call directly to have a chat about this.

Tim says: Hi, Olivia, in your last Q&A, you mentioned that capital gains were still relevant to SMSFs that were in pension phase. Can you please expand?

Tim, as I mentioned in my first question today the ATO just generally need us to continue to track this information, as we need to submit it in the annual return.

Jeff says the same thing, he says, on the last appearance, I mentioned capital gains tax in retirement mode. But he said, can you talk about the mechanics of tracking this? He also said in retirement, I believe there is reference to tax being paid on the taxable component is passed to a non-dependent on death.

So I’ll talk a little bit about this because there's two levels of taxing, Jeff. There is a taxing at a fund level which is where the capital gains and income, et cetera is taxed and if the fund is in full pension mode, all the income is tax exempt, as are the capital gains, as we've just discussed, even though we still track it. Then there's a second level of taxing, which is essentially what's referred to as an inheritance tax, which is just another name that's applied to the tax that is payable when a death benefit is paid from the fund. There are number of strategies available to superannuation members, such as recontribution strategies to address the level of secondary taxing, which is the death benefit tax or the inheritance tax. And you can certainly seek advice around what you can do to minimise that in your case.

Trevor says: My wife and I turned 66 this year, 2020. We have funds in our collective super to pay out our mortgage that sits at $175,000 currently. We were planning to work part time for the next two years and pay out the mortgage when we fully retire in 2022, the logic being our funds are returning more income than the interest is costing us, so we would be marginally in front. Our fear is that our funds take another hit and we may take years to recoup and we will have lost the opportunity. My feeling is that we should pay out the mortgage now while the fund is reasonably intact, the question being is our logic flawed?

Trevor, I understand what you're saying entirely, your logic isn't flawed, but the decision whether to pay it out now or later is one that I can't comment on, unfortunately. And I'd recommend that you actually seek independent financial advice around this because they'll be able to assess your full situation of circumstances and help you in making that decision.

Joan says: regarding the ability to rollover a term allocated pension in pension mode, within an SMSF and also an allocated pension, what are the tax implications and the ability to do this? Who accepts rollovers for term allocated pensions? Not thinking to do this now but with age creeping up and expenses increasing as balances decline, it is looking attractive and would be less stressful in this uncertain period.

Hi Joan, there is an ability to roll over a TAP from an SMSF to another term-life product or annuity. There are a number of institutions out there which have these types of products, but if you're considering it again, I really think it's in your best interest to speak to an independent financial adviser, to make sure that not only you get the best product advice to suit your needs, but also that thinking about all the consequences of rolling out of an SMSF to one of these products. Just to give you an example, if you're currently receiving any type of benefit from Centrelink and you make a change, it could jeopardise your eligibility from a grandfathering perspective. Again, when making decisions quite as significant as that definitely seek advice.

Andy says: Hi Olivia, I have an SMSF corporate trustee and my wife and I are the only two members. I am in pension mode and my wife is in accumulation mode. Do I pay capital gains, and are they treated over both members on a pro rata basis?

Hello Andy, given that you're in pension mode, your portion of the income or capital gains is not subject to tax. As your wife is still in accumulation mode, she's still in a tax payable position. The tax exempt portion of the fund is determined each year via a licensed actuary who will determine the exempt portion based on the member balances. So they not only base it on member balances, but they take into consideration the pattern of contributions and pension withdrawals from the fund.

Brian says: I have an APRA SAF superannuation fund that is with Perpetual. I manage the investments myself, so there is no financial adviser involved. Perpetual charge fees for administering a fund and providing a wrap account that shows the share portfolio and cash in each account for mine, and my wife’s. Previously there was an online trading facility that interfaced well with the platform. This has now been withdrawn and all trades need to go either through Perpetual on adviser broker, you also get access to a better platform with more facilities. Do you know of any trustee companies or organisations that provide APRA SAF superannuation platforms with online trading facilities and do they cap their fees?

Brian, for the benefit of other listeners, a SAF is a small APRA fund. My first question is if you are managing the investments yourself, is there a reason that you're still in a small APRA fund, such as residency? And are you aware that you can actually convert a small APRA fund to an SMSF, which could be a more cost effective option for you and definitely give you more control. Perhaps something worthwhile researching. Unfortunately though, I am not an expert whatsoever when it comes to small APRA fund providers, so I'm not going to be able to help you when it comes to recommending one.

The next question is from Julian. He says: my current plan is to wind up my SMSF on the 30th of June ‘21. My wife passed away seven years ago and my son became the trustee. Because of my age, which is now 80, in a few months’ time and because I've been living off my super, and it's getting to the stage where it's uneconomical to have a fund, my plan is to keep the investments I have and just change the name from the super fund to my name. Would that give me any issues I should be aware of? I do like to make my own decisions as I have lost faith in the experts.

Okay, Julian. There's a few things we're talking about here and the first is in relation to actually winding up your SMSF. When you wind it up, it is possible to transfer the assets from your SMSF to yourself as what's called a lump sum withdrawal. That's how we would actually account for the transaction in your SMSF from an accounting perspective. The first thing is you need to ensure that your SMSF accountant can handle the transfer of assets properly as it's not as simple as you just changing the name on the investments.

The other issue that you need to consider is that you will also be assessed personally for any income or capital gains tax the assets generate. And finally, if you're currently receiving any Centrelink benefits, you may wish to make sure that they're not impacted if you have an increase in the value of the assets held in your own name, so good luck with that.

Charles asks: My wife and I, both 80, have a single SMSF with $6 million in assets as at 30 June. We are on an allocated pension, so we need to withdraw a minimum sum per year, which would have been 7 per cent, but it's now half of that. According to our accountant, the balance in my account is approximately $1.5 million and in hers, $1.625 million totalling $3.125 million. I'm not sure where the remaining $2.875 million sits, and do we need to withdraw 3.5 per cent of the total $6 million or 3.5 per cent of the $2.875 million?

Okay. Hi, Charles. The first thing we need to discuss is that a super fund member can only have up to $1.6 million in pension mode when they commence the pension. The rest sits in an accumulation account and pays tax at a 15 per cent tax rate. Therefore I think what your accountant is telling you here is that the amount you need to draw down from your pension, not the total amount in your fund. I'm confident that the remaining $2.875 million you're talking about is still in your fund. It's actually just sitting there in an accumulation account. In this case, given that’s the event, he is correct, that you only need to draw down 3.5 per cent of the $3.125 million, which would be the total of yours and your wife’s actual pension accounts. But if you'd like to discuss this further, or you have any concerns, feel free to give me a call.

Ian says: Good morning, Olivia, SMSFs sound like a lot of hard work. I can get pretty good returns from my industry fund so I'm not sure if I can be bothered. Is it allowed for an SMSF to have nothing but a few managed funds, though? How much admin work would be involved if someone was to take such an approach?

Hello, Ian. My feedback is that SMSFs are not a lot of hard work if you're dealing with an SMSF administrator. They generally do almost all of it for you. Not to mention that you're likely to pay a lower fee to an administrator than if you're doing all the work and sending it to an accountant at the end of the year. But if you're in managed funds, there is actually very little admin work during the year. The majority of it is actually at the year end and again, handled by your accountant and administrator. So your amount of work and exposure would pretty well be to making the investment decisions as to where to invest the funds and then just monitoring them on an ongoing basis.

And the final question for today comes from Alistair, who says: I received an unsolicited letter, inviting me to transfer my funds administration to an online portal, referenced www.justsuperfund.com.au. How would they have got my fund’s postal address? Have you any insight about this or any similar service because their quote is one third of our existing cost.

Now, I'm glad you asked that question, Alistair, to be honest, marketing like this really makes my blood boil. No one should have access to a list of superfund trustees and their personal details in order to market to them. Just Super actually started this marketing approach over a year ago when they first started sending letters to our clients and I heard about them and when I contacted them and managed to get hold of somebody, they wouldn't disclose how they got the information.

I know for a fact that they run their business out of a residential apartment and I know this because one of our staff members actually lives in the same apartment and the address is on all of their communications, so I'm not saying anything out of school here. And they do send all their work straight off shore. I’ll leave my comments at that, but I think it would be prudent to say there's a general rule in life, you get what you pay for, and if it seems too good to be true, investigate further.

That's it with the questions for this week. Thanks very much for your company this afternoon. It's been a delight to speak with you. Remember that my answers are general advice only, so they may or may not be appropriate or right for you.

I am happy to answer any questions from the listeners that have directed questions here today that I've discussed and I can be contacted at Prime Financial Group take care and I look forward to speaking to you in a month’s time.