SuperAdvice with Olivia Long: 3 August 2023

Hello and welcome to this month’s Super Advice Podcast. I’m Olivia Long, head of growth for SMSF at Prime Financial and Eureka Report’s SMSF coach, 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.

Table of contents:
Taking the Plunge into an SMSF
SMSF or a Super Fund?
Running Through Some Super Rules
The Sale of a House and Super
Death and Super for a Spouse
Non-Concessional Cap Cut-off Dates
Tax, Tax-Free SMSF Withdrawals
Rolling SMSF Back to Accumulation
Super Funds’ Paltry Cash Rates
Tax-free Downsizer Contributions
Dissolving a Joint SMSF
Lump Sum or Pension Withdrawal?
Property Exposure in Super Fund
Super Tax on a $23 Million Windfall
Claiming Concessional Contributions
Moving SMSF Money to Super Funds

Our first question today is from Anthony. He says: “As a long time Eureka subscriber, I’m looking to take the plunge and setup an SMSF. Can you please provide information to assist with the following options, including estimated cost for each model, as well as recommend some reference points to help me work through each option. The first option is to DIY SMSF, where I set it up and run it myself; a midway, where I set it up myself and get someone to manage it; or a full service SMSF, where I get someone to set it up and run it.”

Now, Anthony, firstly, I wouldn’t recommend that you establish and run the SMSF yourself because from a compliance and taxation perspective, the rules and requirements are complex, even for specialists, so you really do need a tax agent to handle at least the accounting side of it for you. If you’re going midway though, I’d still recommend that your tax agent establishes the fund as there’s a range of legal documents and specific requirements even around the investment strategy template that you need to ensure are covered.

Now, the estimated cost for setup for a mid-range fund is anywhere from sort of $800 to $1,000, which can actually be paid by the fund and average administration costs including audit generally range anywhere from $2,000-2,500.

With the full service SMSF, I’m assuming that you’re talking about administration, compliance and advice. Now, the administration costs are as I just mentioned, but the advice component really depends on who you talk to and how they charge. Some charge a percentage of your FUM, some charge a fixed fee, so it’s difficult to say what you’re likely to pay without actually knowing your balance. So, sorry I can’t be a bit more helpful there.

Michael says: “Thank you for all your articles. Would it be possible for you to write an article on the costs of having around $400,000-500,000 in super invested in a balanced option? Now, this figure is often said to be the amount that you require to have an SMSF, but if you don’t want to have an SMSF, which super funds would be the best value for money to take care of your super? Most of them quote a balance of $50,000, but I thought it would be interesting to look at the difference between an SMSF and a balanced option at the higher level. Are there some low-cost super funds such as Hostplus, Rest, AustralianSuper or CareSuper?” 

Now, Michael, we’ll certainly give consideration to the article, but with respect to low-cost funds, I recommend that you visit Canstar.com.au, which will give you information not only about the cost for each particular fund, but the typical rate of returns and other member benefits of each super fund, along with their ratings, so it’s a very useful tool for most listeners, that’s Canstar.com.au.

The next question from Gerry says: “Hi, Olivia, hope you’re well. I am a Eureka Report InvestSMART subscriber and wondered if you could check my understanding of the super rules. I am not looking for any financial advice. At the end of the year, I would have worked for 600 months, therefore it’s time to consider retirement, hence the questions. The first question is: if I was to make a non-concessional contribution, let’s say, $109,999 or less this financial year, would it attract the 15 per cent contribution tax because tax has been paid on that money?” 

The answer is, assuming you haven’t triggered your bring-forward rule in the last couple of years, then a non-concessional contribution of $110,000 can be made and as it’s from after-tax funds, then no tax is actually payable by the fund.

“The next question is, what’s the significance, if any, of contributing an amount of up to a dollar less than the maximum allowable of $110,000?”

So, quite simply, there’s no significance there, if you’ve got the $110,000 available to contribute, then there’s no reason why you wouldn’t, unless you’re concerned that you may have exceeded your concessional contribution cap of $27,500, because any excess will drop into the non-concessional cap.

“The next question is, without invoking the bring-forward rule, anything beyond $110,000 breaches the non-concessional cap and consequently there could be tax implications, is this correct?”

Now, the answer here is that it could be seen as triggering your bring-forward cap if you’ve already fully utilised your concessional cap, so that’s the consequence there.

Gerry then says: “Is the advantage of the bring-forward rule that dollar amounts of up to $330,000 can be made in a single financial year if one wanted to, as opposed to making an annual contribution?” 

The answer is, yes, that’s correct, it allows people essentially that want to maximise their contributions to put more in than their annual cap and there’s a number of reasons that people might want to do this. So, say you’re aged 74 and you want to maximise the amount you contribute before becoming ineligible, perhaps people want to maximise their contributions before turning on a pension, or say there’s an asset which people want to invest in such as property and they want the additional funds now to allow them to finance the purchase, then they’re all just some of the reasons why people might trigger the bring-forward rule.

Gerry then says, “If having made an overall $330,000 non-concessional contribution, I’d have to wait a further two years before making any further non-concessional contributions?”

And yes, that’s correct, you would have been deemed to have used up your cap for the following two financial years.

The next question from Graham says, “My wife and I have funds outside of super from the sale of a house. We’re both under the age of 75. Can we contribute funds without penalty before we turn 75 and how much?”

Now, Graham, if this house is your primary residence and you’ve owned it for at least 10 years, then you and your wife may each be eligible to make a downsizer contribution which aren’t actually subject to the caps. Now, if this house isn’t your primary residence, then yes, you can still contribute subject to your total super balance cap as at 30 June of the previous financial year. So, if your super balance is below $1.68 million, then you have the ability to contribute $330,000 and then as the balance increases, it scales back to $220,000 if your balance is above $1.68 million, but less than $1.79 million. Then above this amount, up to $1.9 million, where you can no longer make a non-concessional contribution, you can contribute $110,000. You may also wish, however, to consider making a concessional contribution, assuming that you haven’t maximised your cap of $27,500. So, a pretty wordy answer there, but if you’ve got any questions, feel free to give me a buzz.

The next question from Siew-Lee says, “Hi, Olivia, great to have you back on air. I’m a still a way off retirement, but had some questions around what happens to taxation super in industry and retail funds if you die before retirement in accumulation phase. Some funds automatically give it to your spouse, some to your estate, unless you submit a binding nomination. Most of these don’t seem particularly binding, however, they need resubmission every three years. Now, if you nominate your super to go to your legal representative, it becomes part of your estate for distribution, do you pay more tax versus if it rolls over to your spouse and does it need to rollover into their super fund to avoid a taxable event?”

Great question. So, essentially, if your super goes to your spouse upon your death, they are considered a dependent for tax purposes, so they can receive this amount directly and you don’t need to wait for probate to be issued. However, if you leave it or direct it to your estate, there are potential tax consequences depending on whether the taxable component is ultimately inherited by a non-death benefit dependent such as a child, because in this scenario, the estate has to take 15 per cent tax out of the taxable component before payment to the beneficiary. Now, the downside of directing your super to your estate would be that probate needs to be issued before your spouse can access the funds.

Now, in relation to death benefit nominations, one of the benefits of an SMSF is that you can make a pension, if you’re running a pension, reversionary. So that means that it ultimately reverts to the surviving spouse who can continue to access the funds immediately. You can also elect to make what’s known as a non-lapsing binding death agreement, which means that you don’t actually have to make a death benefit nomination every year. So I hope that answers your question there.

Tim then says, “How is the age limit for non-concessional caps calculations determined? Is the cut-off date any time in the fiscal year that you have your 75^th birthday or is it not allowed any date after your actual 75^th birthday? Many thanks for a great Q&A column.”

Thanks, Tim. Essentially, the contribution needs to be received by the fund within 28 days after the end of the month in which you turn 75. So, say you turn 75 on the 15^th of August, you’ll have until the 28^th of September to make the non-concessional contribution. So, that’s the age limit, assuming that you have less than $1.9 million in your fund, is age 75, so you’re right there.

Peter says, “My SMSF accumulation account is split into taxed and tax-free elements. If at any time I wish to withdraw and I’m over age 75, to avoid the death tax, does it have to be pro rata? For example, I assume I cannot elect to withdraw only the tax component?”

Now, you’re correct, Peter. Unfortunately, you can’t cherry-pick what components you take from. The only time you can actually do that, is if you’re running multiple pensions or if you have an accumulation account, because in this scenario you’re able to select the one which has the highest taxable component, which then puts your non-dependent beneficiaries in a more favourable personal tax position on receipt of any super balance.

Brian says, “Hi, Olivia, I enjoy reading your articles on super so keep them coming! I have an SMSF in retirement phase, in which my wife and I have maxed out our contributions. I also have substantial funds outside of super, the income from which we can live on comfortably. As the government will be stopping the 50 per cent discount on mandatory withdrawals from super in retirement from the 1^st of July, we’re considering changing our SMSF back to the accumulation phase. Now, this will enable each of us to build up our SMSF balances closer to the proposed $3 million cap each. Now, I realise that our SMSF will have to pay the 15 per cent tax on income, but this is more than covered by the franking credits we receive and we trade very little, so the 10 per cent CGT won’t apply. Are there pitfalls in this strategy that I need to be aware of?”

Yes, Brian, there are pitfalls and one thing that you need to be aware of, is that if you roll back to accumulation mode your quarantined pension components, so that’s the split between the taxable and the tax-free, will no longer be set in stone. So, any income that’s then received will have a taxable component associated with it, which will then potentially dilute your tax-free amount. Now, when a balance is in pension mode, the percentages are locked, so any income coming into the pension account will be split between the taxable and the tax-free component. So, in this scenario, there are a number of important items that really do need to be taken into account if you’re going to make that decision. So, this is one example where I’d strongly recommend speaking with a financial adviser to obtain a recommendation on your personal circumstances.

Peter has a great question, he says, “Can you please explain why super funds do not offer a better cash rate? My current fund is paying 2.77 per cent in income mode and 2.33 per cent in accumulation mode, well short of current bank rates.”

Peter, I have no idea why, so I can’t explain, but I can only suggest that perhaps you shop around for accounts with better rates.

Malcom says, “I understand that if I sell my principal place of residence for the past 30 years, I’ll be able to use part of the proceeds to transfer up to $300,000 into super. Can you advise if the normal 15 per cent tax on super contributions would be payable?”

And the answer there is, no, because as I mentioned earlier, this is known as a downsizer contribution and isn’t subject to tax, nor is it caught by the contribution or the total super balance caps.

Malcom then says, “Will the transfer be counted as part of the transfer balance cap when I convert my accumulated contributions into a pension?”

And the answer is, yes, if you turn on a pension after the contribution, it will count towards the transfer balance cap. If you have more than $1.9 million in the fund and then turn on a pension, anything over this cap can remain in accumulation mode.

And finally, “From what I’ve been able to determine, I don’t have to purchase a smaller house or any house at all for that matter, to be able to make these additional contributions, that downsizer tag is a little bit misleading in that regard.”

And the answer there, Malcolm, is yes, that’s correct, you don’t have to then purchase any further houses or anything to be eligible.

The next question from Bill says, “My daughter and her husband were jointly running an SMSF and their partnership is about to be dissolved. The settlement involves my daughter remaining in the SMSF, which has as its primary asset, the business premises of her company. Her husband exiting with a larger balance than he contributed, which apparently is the family law settlement, initially designed to protect women, but in this case it’s working in reverse. So what action does my daughter as the remaining trustee need to take, if any at all, to ensure that her ex-husband actually shifts the cash settlement into a suitable super fund? He is unreliable and a cash-only operator.”

Okay, Bill, her only obligations would be to ensure that the Family Court order is followed. So, he is obligated to open a new super account and then when he requests the rollover, she’ll need to ensure that it’s actioned and the cash is rolled out within three business days. So once his balance is actually out of the fund, she can then attend to removing him as a trustee, which involves specific documentation being prepared which he will also need to sign. So, essentially, the ball will be in his court and she won’t need to act until he actually makes the request to her.

Michael has a good question: “When is it better to make a lump sum withdrawal from super rather than a pension withdrawal?”

Now, one example, Michael, would be if you have maximised your transfer balance cap and you’ve withdrawn more than your minimum pension requirement for the year. So, in this scenario, you may wish to take a lump sum withdrawal rather than a pension payment because a lump sum withdrawal will actually create room in the transfer balance cap, so if there is a possibility of making an additional contribution into the fund later on, such as a downsizer contribution, it will actually allow you to push some of that amount into the tax exempt environment whereas withdrawals that we categorise as pension payments do not actually create this extra room in the cap. So, very good question there.

Vanessa says: “I’m five years from retirement, I’m in the default growth MySuper stream with Cbus. I want to know if I should change streams, as I’m particularly concerned about exposure to property. The stream I’m in has 12 per cent exposure to property, I’m looking at high growth, so 8 per cent property growth, plus 10 per cent property, indexed diverse 0 per cent, conservative growth on 9 per cent and conservative at 6.5. Any feedback is appreciated.”

So, Vanessa, essentially there’s no right or wrong answer here, it really comes down to your personal risk tolerance and what you feel comfortable with, so perhaps if you want some feedback on that, it may be worthwhile speaking to an adviser. Otherwise, really, the decision is entirely with you.

Matty says, “I am Matty, aged 65 and I currently have $23 million in my SMSF in pension mode and nil amount in accumulation mode as I withdrew all the accumulated amount from the fund a while ago. Currently I pay no tax on my SMSF earnings given it’s all in pension mode. I got lucky with one of my investments that gave me a $20 million return on a $1.5 million investment. Can you kindly let me know what will happen to our SMSF after the 1^st of July, 2025? As I already withdrew a while ago the excess accumulation amount and I only have pension money left in our fund, how does this special unique scenario work after the 1^st of July, 2025?”

Firstly, Matty, that’s wonderful and congratulations on such a big win. I’m sure the listeners, as I, would love to know what the investment was that you made the huge gain on. But, sadly, from the 1^st of July 2025, any excess that you actually have over the $3 million will essentially be taxed at 30 per cent, though the impact of that tax won’t be felt until the lodgement of the 2026 financial statements. However, having said that, we do have another election before that time, so who knows what changes may eventuate between now and then, so watch this space.

Carlos says, “I have a question for you. My wife recently retired on July 23^rd and will begin to receive a modest super income from her fund. I’m still working full-time, we have some extra income coming in from a rental property we own and we pay taxes for the extra income we receive. My question is, if we put the money into my wife’s super fund, say $25,000 in the financial year 2024, can she claim concessional contribution tax in the 2023-24 return?”

So, the answer here, Carlos, is providing she’s under the age of 67, then she can make a concessional contribution of up to $27,500. So, any employer contributions this financial year will need to be taken into account and she’ll also need to make sure that she’s got sufficient income to be able to claim a tax deduction for the $25,000 that you mentioned. So, I would recommend that you speak to her personal accountant before you make the contribution if you’ve got any doubts around the personal taxable income.

And Chami says: “Scott Francis recently suggested five to seven years cash in an SMSF or roughly 25 per cent of the portfolio. I have an SMSF but I’m slowly moving to a Hostplus indexed balanced account as I get older, as it has 8 per cent cash, 17 per cent fixed interest. Initially, I was going to select their balanced account, but noted it only has 5 per cent cash and 3 per cent fixed interest. I wonder how many retirees have just selected balanced – Hostplus, for example, seem very transparent with their returns to the 31^st of May ’23. Their International Index Fund returned 19.15 per cent so far in 2022-23, so it should be a stellar year for super returns.”

Great point, Chami. This is something I’m not privy to, but perhaps if you contact them directly, they may be able to provide you with some statistics.

Chami then says, “My SMSF moved into pension mode roughly five years ago, my Hostplus is in accumulation mode. If I move my last $300,000 from my SMSF into Hostplus via a non-concessional contribution rather than a rollover, will my transfer balance cap limit change from $1.6 million to $1.9 million? I’m just looking for general advice, the whole super system is so complex, I started putting into super 42 years ago and the number of changes made is frightening.”

Unfortunately, Chami, the transfer balance cap assessed to you is based on the cap at that time, so if you’ve fully utilised the $1.6 million back when you commenced the pension, then this is your cap. If you had only partly utilised the $1.6 million, then you have the remaining balance, plus a portion of the new cap available to you, but this, in very basic terms, is based on the percentage cap that you haven’t utilised.

So, that’s all for today, some great questions, 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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