SuperAdvice with Olivia Long: 14 September 2023

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Hello and welcome to this month’s Super Advice Podcast, I’m Olivia Long, Head of SMSF Growth at Prime Financial and Eureka Report’s SMSF Coach and it’s great to be here. I’ll be hosting this podcast every month, so if you’ve got a question for our next episode, please send it to superadvice@eurekareport.com.au. Before we get going, please remember that my answers today are general in nature, so they may not be appropriate or right for you.

Our first question today is from Michael, who says, “Hi, Olivia. I recently turned 60 and will be retiring in a few months. I have a Brighter Super account with $1.25 million and have just opened an AustralianSuper account with $250,000 to utilise their member direct option which is paying 5 per cent in their at-call cash account. The plan being to have less than four years’ worth of withdrawals in this cash account. Having a requirement to withdraw a minimum of 4 per cent in pension mode, if I turn both the Brighter and AustralianSuper accounts to pension mode, am I required to draw 4 per cent from each pension account or can I draw 4 per cent from just one of the accounts as long as I make the minimum total of $60K per year.”

Hello, Michael. Great question, but the simple answer is if you have two super accounts and you want to convert both to pension mode, then the minimum pension is going to be needed to be withdrawn from each pension account, so probably not what you wanted to hear there.

Next question from Daniel, he says, “I am 56, I earn more than $500,000 per year and have $1 million in super. I want to work until I am at least age 70. I envisage inheriting a very large amount of money in the next five years. Given the timeline on super, should I borrow now to maximise my non-concessional contributions, knowing that I can pay the principal back in five years? But I realise I cannot claim the interest from tax.”

My comments are, Daniel, firstly, why on earth would you want to work until you’re 70, we need to find you a hobby. But unfortunately, your question constitutes financial advice which I can’t answer. Given your circumstances, I would believe it is prudent for you to actually seek financial advice, so I’m happy to refer you to someone if you’d like to give me a call. However, I can say that with non-concessional contributions, if your balance is below the $1.68 million dollars and you inherit money before you turn 75, given the work test requirement for non-concessional contributions no longer exists, you will still be able to utilise the $330,000 bring-forward provision, so definitely worthwhile getting advice there.

Next question from Walter, says, “Hi, Olivia. I was interested to read this reply as I have two pensions in my SMSF. One, has a higher proportion of taxed component which is the one I asked my accountant to allocate my pension from, however he has stated that only the extra withdrawals over the minimum amount are eligible for this scenario, is this correct?

Walter, if you have a pension account which is split into taxable and tax-free components for the one member balance, then no, you cannot cherry pick where it comes from unfortunately. If you have two pension accounts in your SMSF, then after meeting the minimum requirement for each pension, you can then choose where you wish to allocate any excess pension withdrawals to. So, this allows you then to run down the pension with the highest taxable component first, but you must meet your minimum pension requirements before you can actually do this.

The next question from Charles relates to a headline in the Financial Review on August the 8^th, saying, “Is a super withdrawal just before death tax free?”

Very good question. A recent ruling may have implications for SMSFs for an inheritance strategy recommended by many advisors and the case is this, this particular case involved the member’s adult children putting in the request to take out a lump sum from the super fund and they received acknowledgement of their request that afternoon, but then their father passed away that evening, so their actual payment wasn’t paid until after he had died, which was about four weeks later. So the issue was whether the amount should be treated as a commutation or an after-death payment to the beneficiaries. Now, as always, it’s important to read what the trust deed and the governing rules confirm as these are essentially the rule book to follow.

But in this particular case, it came down to whether the trustees of the super fund were aware at the time of processing the actual payment that the member had died or not. Now, the adult children didn’t let the trustees of the super fund know that their father had passed, so at the time when the payment was made, the ATO was satisfied that the trustee did know that the member had passed away, so the amount was deemed to remain as a member withdrawal and therefore, tax free. So, a bit of a complicated one there, definitely unusual.

[Arjuna] says, “Please review if the following question can be considered. What are the strategies and potential constraints to overcome for an over-65 non-working person to reduce inheritance tax from super?”

So, as the work test for non-concessional contributions has been removed, this allows scope for people under the age of 75 that have a super balance less than $1.9 million as at 30 June of the previous financial year to do a recontribution strategy. So, to withdraw from the fund, an amount with a large taxable component and then recontribute it back, when you recontribute it back in, it will be a non-concessional contribution, therefore converting to a 100 per cent tax free amount. Now, the key here is that the non-concessional contribution caps and how much you actually have in super, as this will determine the amount that you can recontribute back in. So, the other key point to remember is that the cash must physically be withdrawn from the fund and then recontributed back in so your super balance is tied up – so, if your super balance, I should say, is actually tied up in a liquid asset such as property, then this will become harder.

So, to ensure that the contribution maintains its tax free nature, you need to ensure that it moves to pension mode to lock in the percentage that is tax free, as if any income is then received in an accumulation mode, it automatically becomes a taxable component of the fund. So, depending on how much of the balance you with to convert to fully tax free, can see you doing potentially a number of stop and restarts of the tax free pension to combine the new non-concessional contribution, or it may see you commencing multiple pensions.

The next question is from Jenny, “My partner and I have an SMSF, where we both have amounts in accumulation and pension mode. We’re about to sign up to Centrelink as we qualify for a part-pension via the asset test. Is there any benefit, reason or requirement for us to move all funds into pension mode? I understand that this would increase the amount that we must take as pension, but we currently do that now. We are both near 70 and unlikely to work again apart from the occasional, VEC/AEC role.”

Jenny, from a super fund tax perspective, pension mode, if you have the revenue personal caps, it means that the fund won’t pay tax on that portion of the fund that it would in accumulation mode, so being over the age pension, whether in accumulation or pension mode is actually counted as a financial asset under the assets test and deemed to earn income under the income test at the rate of 0.25 per cent on the first $100,200 and then 2.25 per cent thereafter. But having part of your super in accumulation mode won’t actually result in a higher aged pension payment under either test.

The next question from Shang, he says, “I don’t quite understand the withdrawal of taxable and non-taxable components. I’ve got 30 per cent of my total super balance of $5.1 million in tax free components. Questions – I’m still in accumulation mode, aged 59, I’d like to increase the tax free components to benefit the non-dependent beneficiaries in the future. Unless I withdraw the whole amount, if I ever knew I won’t see the next sunrise, how can I do that?”

Great question. Look, if you’ve got more than $1.9 million in super, you can’t actually make a non-concessional contribution into the fund, so the only way you could actually pass this onto them tax free is by withdrawing an amount and then they make a non-concessional contribution into their fund. But then this is caught by their preservation rules, until they meet a condition of release and their personal contribution and total super balance caps. So the only alternate, as you say, is to withdraw from the super fund before you pass away.

The next part of the question is, “When I am in pension mode, I have to withdraw pro rata from the respective components, correct? I can’t just withdraw from the taxable balance?”

And that is correct. As I mentioned earlier, you can’t cherry pick from the one super pension account. Withdrawals do need to be made proportionately and the only way that you can cherry pick is if you have two pension accounts in your super fund, then after meeting the minimum requirement for each one, you can choose where you wish to allocate any excess pension. So, this then allows you to run down the pension with the highest taxable component first.

Monica says, “Dear Olivia, I have three children, my Aware Super financial advisor told me that if both my husband and I die, then I should state in my will that my super should go to my legal representative rather than to my estate to avoid tax implications for my beneficiaries, or children, who may be paying tax at this time, is this correct? I find it a bit confusing.”

So, Monica, it is a bit of jargon there, but firstly, if you nominate your legal personal representative, it is essentially nominating your estate, so that is the terminology which is needed to be used for the nomination to be valid.

Monica then asks, “If one of my children is paying tax at the time this happens, lowest income tax bracket, will there be any benefit of our super passing from my legal representative to them? Will there be any tax implications?”

Now, the tax that adult children will pay will depend largely on the split between the taxable and tax free amounts of their inherited amount. So, if the adult child is in the lowest bracket and the inherited amount has a taxable component, then this may push them into a taxable position personally or into a higher taxable position on their other income.

The next question from Monica is, “If one my children when they are over 18 becomes my legal representative, then if my and my husband’s super passes to them, will they have tax implications if they are paying tax at that time?”

Now, unless the 18-year-old is still considered a tax dependent, then yes, they will pay tax on the taxable component of their inherited amount.

Monica says, “Thank you, your podcast is great.”

Thank you very much, Monica.

Moving onto Martin, “I have both pension and accumulation and have maxed the transfer balance cap. I wish to withdraw money for renovations, can I draw this directly from the accumulation account?”

Now, Martin, if you have met your minimum pension account requirement and you do have an accumulation account, you can absolutely withdraw the excess from this balance. But you need to ensure that your accountant does the appropriate minutes to reflect this and as always, ensure that the trust deed allows for this to occur.

[Arif] says, “Hi Olivia, I would be grateful if you could double check your answer to the question from the reader that asked the above question. If your reader has $23 million dollars in a pension, surely the earnings on this are completely tax free? So, if the new 15 per cent tax on unrealised gains comes into effect, your reader will only have to pay 15 per cent above any unrealised gain and the exemption on the pension from tax would still apply, would it not?”

So, Arif, if the balance is in full pension mode, then at the moment there is the full tax exemption. If the new legislation comes in, as it stands at the moment that anything over $3 million dollars will be taxed at 15 per cent.

And finally, the last question is, “I have a question regarding residency of an SMSF, would you be willing to answer that?”

Yes, I can answer that and I’m happy to do so in my next podcast.

So, that’s all for today, thanks for joining me. If you’ve got a question for our next episode, please send it to superadvice@eurekareport.com.au.

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