Superannuation Strategies

/Superannuation Strategies
Superannuation Strategies2021-06-30T09:07:29+00:00

Superannuation Strategies

Superannuation Strategies

What follows are a number of strategies that when implemented can help you save tax and maximise your superannuation.

The strategies covered include:

  • salary sacrificing
  • re-contribution before turning 60
  • re-contribution after turning 60
  • super splitting with spouse
  • transition to retirement pensions
  • self-employed super contributions
  • reducing debt by selling assets to an SMSF
  • maximising the tax-free portion of a super fund in times of market downturn.

Before using any of these strategies you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.

Sacrificing salary as a super contribution.

Salary sacrifice is a superannuation strategy that has been around for years. This strategy is all about redirecting pre-tax salary or wages into superannuation instead of paying tax then making a super contribution.

It really works best when the tax payable on the income sacrificed is more than the Medicare levy inclusive lowest tax rate of 21%. This is because tax paid by a super fund on contributions is 15%. Before the marginal tax rate was increased from 15% to 19% the only benefit was a saving of the then 1.5% Medicare levy.

In addition a person is disadvantaged if their income is below the tax payable threshold. For the 2017 year this is $18,200 and, when the low income tax offset of $445 is taken into account no tax is paid on income up to $20,542.

Steps to implement Strategy

  1. Contact your employer to see if they allow you to sacrifice some of the salary as extra superannuation.
  2. If they say yes, ask how much they are contributing as superannuation guarantee contributions.
  3. Calculate how much you can afford to give up of your take-home salary and request your employer to salary sacrifice the equivalent pre-tax salary amount. This will depend on the marginal rate of tax that applies to salary being sacrificed.
  4. Make sure that the amount being sacrificed, when combined with the amount being contributed as SGC by your employer, does not exceed the maximum concessional contribution limit.

Documentation Required

The only documentation that applies to this strategy will be dictated by trust deed of the SMSF. The trust deed might stipulate that documentation must be completed so that employer contributions can be accepted from an employer contributor to the fund. Any other documentation required will be what is required by the employer before salary can be sacrificed as extra super contributions.

Warning One

With the maximum concessional super contributions reducing to $25,000 for everybody, care must be taken to make sure that the amount of salary sacrificed as extra super contributions does not exceed the $25,000 limit

Warning Two

There are some employers that reduce the amount of SGC they contribute when an employee salary sacrifices. Although this is mean and underhanded it is legal. If you are thinking of salary sacrificing check with your employer first to make sure your SGC contribution will not be reduced.

Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.

Re-Contribution Before Turning 60

Under this strategy a person withdraws the maximum tax-free amount they can from superannuation and then recontributes it as a non-concessional contribution. This strategy applies to someone under 60, who wants to retire and produce an income from a superannuation fund, and has little to no tax-free benefits.

By making a large non-concessional contribution the tax free percentage of the member’s superannuation increases. The tax-free portion is equal to the percentage that the tax-free benefits are of the total value of the member’s superannuation.

This is important for someone under 60 as any taxable pension income they receive will be taxed. By increasing the tax free percentage this means a greater proportion of the pension received will not be taxed.

Example of How strategy works

The tax effectiveness of the re-contribution strategy for someone under 60 is best illustrated by the experience of Agatha Marple. After turning 55, she has $600,000 in superannuation and has decided to retire. Agatha will receive $20,000 a year in royalty income and has worked out she needs to receive an account-based pension of $50,000. If she did nothing her tax position would be as follows:

    $      $
Super Pension and Royalty 70,000
Tax payable including Medicare levy 15,697
Less super pension rebate   7,500
Less net tax payable   8,197
After-tax pension received 61,803

If Agatha, instead of starting the pension immediately, took her maximum tax-free lump sum of $195,000 and then re-contributed it as a non-concessional contribution, 32.5% of her superannuation benefits would be tax-free benefits, as follows:

     $ %
Taxable benefits 405,000 67.5
Tax-free benefits 195,000 32.5
Total super 600,000 100

If Agatha took the same pension of $50,000 this would be her tax result:

     $      $
Pension 50,000
Less 32.5% tax-free component 16,250
Taxable pension 33,750
Royalties 20,000
Taxable Income 53,750
Tax payable including Medicare levy 9,897
Less super pension rebate 5,062
     LITO    194
Net tax payable   4,641
After-tax pension and royalties received 65,359

This re-contribution strategy provides the greatest benefit for people with higher superannuation benefits and larger superannuation pensions being paid. The strategy becomes more valuable to a person under 60 with other sources of taxable income.

Documentation and Actions Required

  1. Letter from member to trustee/s of SMSF that they have met condition of release and that they want a lump sum payment up to their maximum tax free limit.
  2. Resolution by trustee/s stating request for lump sum has been received and that payment will be made.
  3. Letter from trustee/s to member advising of payment of requested lump sum.
  4. Letter from member enclosing non-concessional contribution and requesting that an account based pension commence.
  5. Resolution by trustee/s acknowledging receipt of non-concessional contribution and stating request for an account based pension has been approved.
  6. Letter from trustee/s to member advising that account based pension will be paid and its components.
  7. Trustee/s complete ATO documentation to register for PAYG withholding tax.
  8. Trustees calculate PAYG withholding to be deducted and set up regular payment direct from SMSF bank account.
  9. Once a quarter complete PAYG withholding statement paying amount withheld to ATO.

Warning

Care must be taken when implementing this strategy if investments have to be sold to fund a lump sum payout. To minimise any capital gains tax payable a pension should be started, all investments needed to fund the lump sum payout are sold while the fund is in pension phase and not paying income tax, convert the fund back to accumulation, and then payout the lump sum.

The amount that can be re-contributed as a non-concessional contribution cannot exceed the limits set. Currently if you are under 65 they are $180,000 a year or, if you have not exceeded this limit in the previous three years, you can contribute up to $50,000. If you are over 64, under 75, and meet the work test, the limit is $180,000 a year. From July 1, 2017 the maximum limits will decrease to $100,000 for one year and $300,000 if the bring forward rule can be used.

Before using this strategy you should seek professional advice as to whe4ther you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.

Re-Contribution After Turning 60

One of the fundamental changes made to superannuation under the new system was to reduce the many components of superannuation to just two, those being taxable benefits and tax-free benefits. This re-contribution strategy aims to increase the tax-free benefits percentage to provide a tax benefit upon the death of the member.

Taxable super benefits paid to a non-dependant are taxed at 17% including the Medicare levy. Under this strategy a super fund member takes a lump-sum tax-free payment after turning 60. This lump sum is then re-contributed to the super fund as a non-concessional contribution. An account-based pension is then commenced that locks in the tax-free percentage of the member’s benefits.

When the member dies any residual superannuation benefits passing to non-dependants are received by them tax free. The limit on how much a person can make a year in non-concessional contributions restricts the amount that can be withdrawn and re-contributed.

Example of how strategy works

Agatha Marple had commenced an account-based pension after taking a lump sum of $195,000 and re-contributing it. Under Agatha’s will her whole estate is to go to her adult nephew. If she does nothing, and upon her death she has $100,000 left in superannuation benefits, 67.5% of the $100,000 passing to the nephew and would be taxed at 17%.

Agatha is aware of the tax consequences of her doing nothing and decides at the age of 63 in May 2017 to withdraw all of her super as a lump sum of $500,000. To do this she must commute her account-based pension then take the lump sum.

This lump sum is then re-contributed back to her SMSF as a non-concessional contribution of $500,000 before 30 June. Once this is done her super fund will be made up of 100% of tax free super benefits.

If Agatha immediately starts another account-based pension that is still being paid at the time she dies, her super benefits remain at 100% tax-free. If Agatha died while still having $100,000 in superannuation, her nephew will now pay tax no tax on what he receives, a tax saving of $11,475.

Documentation and Actions Required

  1. If a member is in pension phase prior to implementing this strategy a letter needs to be sent to the trustees requesting that their pension be commuted back to accumulation phase. If investments must be sold to fund the lump sum these should be sold while still in pension phase to minimise any capital gains tax payable.
  2. Letter from member to trustee/s of SMSF that they have met condition of release and that they want a lump sum payment. The value of the lump sum payment will be limited to the amount that can be contributed as a non-concessional contribution. Currently this $540,000 applies if the member has not exceeded the $180,000 non-concessional contribution cap in the previous three years and they are under 65.
  3. Resolution by trustee/s stating request for lump sum has been received and that payment will be made.
  4. Letter from trustee/s to member advising of payment of requested lump sum.
  5. If maximum non-concessional contribution is to be made after July 1, 2017 $100,000 must be contributed before 30 June in the year the lump sum is taken, and then $300,000 contributed after July 1 for the next financial year and then no more contributions for the two following financial years.
  6. Letter from member enclosing second non-concessional contribution and requesting that an account based pension commence.
  7. Resolution by trustee/s acknowledging receipt of non-concessional contribution and stating request for an account based pension has been approved.
  8. Letter from trustee/s to member advising that account based pension will be paid and its components.
  9. Trustee/s complete ATO documentation to register for PAYG withholding tax.
  10. Trustees calculate PAYG withholding tax to be deducted and set up regular payments direct from SMSF bank account.
  11. If PAYG withholding tax has been deducted once a quarter trustee/s complete PAYG withholding statement paying amount withheld to ATO.

Warning

Some experts have raised the concern with this strategy that it may be attacked by the ATO under Part IVA. For Part IVA to apply, a taxpayer must have entered into a scheme or arrangement where the primary motivation is to gain a tax benefit. In this case the person taking the lump sum then re-contributing it does not receive the benefit, his or her heirs do. Before implementing this, and the re-contribution strategy for people under 60, you should seek professional advice.

The amount that can be re-contributed as a non-concessional contribution cannot exceed the limits set. Currently if you are under 65 they are $180,000 a year or, if you have not exceeded this limit in the previous three years, you can contribute up to $540,000. If you are over 64, under 75, and meet the work test, the limit is $180,000 a year. These limits decrease to $100,000 a year and $300,000 from July 1, 2017.

Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.

Super Splitting with Spouse

Originally when superannuation splitting with a spouse was introduced it was thought only higher income earners would benefit. This was because those people tended to have large amounts in super and super splitting was a way of reducing an excess superannuation benefit when there were reasonable benefit limits (RBLs).

With RBLs effectively being re-introduced with the $1.6 million pension transfer cap super splitting can be really important when one member of a couple has a much higher super balance. In addition people with relatively low superannuation amounts will benefit from the ability to split super contributions with their spouse.

The benefit of super splitting, especially for people with non-working spouses with no superannuation, is the effective doubling of the tax-free lump-sum limit. People who meet condition of release, and they are over 54 but under 60, they can withdraw up to $195,000 as a lump sum for the 2017 year. Lump sums withdrawn in excess of the limit are mainly taxed at 15%.

Under the super splitting provisions up to 85% of a member’s super contributions can be split with a spouse. Super splitting with a spouse is not available when:

  • The funds deed does not allow super splitting,
  • a member has already made an application for super splitting in the relevant year,
  • the amount of the benefit to be split exceeds the maximum splittable amount,
  • the members spouse is 65 years or older, or
  • the members spouse is aged between 54 and 65 and they have already retired.

For the purposes of super splitting a spouse includes:

  • a person that the member is legally married to,
  • a person that the member is in the relationship with that is registered under certain state or territory laws that including registered same-sex relationships,
  • a person of the same or different sex who lives with a member on a genuine domestic basis in a relationship as a couple also known as a de facto spouse.

An application to split a member’s super contribution with their spouse can be made immediately after the end of the financial year in which the contributions were made. Not all contributions are splittable with a spouse. In simple terms only concessional contributions, including employer, salary sacrifice and self-employed contributions, can be split with a spouse.

Super splitting can have two benefits. The first benefit is for people who want to access the maximum amount tax-free as a lump sum before they turn 60. The earlier this strategy is started the better. Where this occurs, a couple that would have only had access to the maximum tax-free lump-sum payout for the working spouse can now have access to the tax-free amount for both.

The second benefit is where a person has a much younger spouse and they want to build up their superannuation so that they can increase their age pension entitlement. Superannuation is not counted as an asset by Centrelink until a person reaches age pension age. Again the earlier that this strategy is started the less superannuation the older member will have when they become eligible for the age pension first.

Super splitting as a strategy could be combined with the pre-60 re-contribution strategy to create a tax-free super pension for a non-working spouse. This would be achieved by the working spouse, upon reaching his or her tax-free lump-sum threshold in the super fund, splitting the maximum contribution with the non-working spouse.

Once the non-working spouse turned 55, they could advise the super fund they have retired and did not intend working and request a lump-sum payout up to the tax-free limit. These funds could be used to pay off a mortgage or be re-contributed as a non-concessional contribution. The non-working spouse would then start an account-based pension made up of tax-free pension benefits.

Documentation and Actions Required

  1. After the end of the financial year when the contributions were made a request to split a member’s superannuation with their spouse must be sent to the trustees.
  2. The form or letter should state the following information for both the member requesting the split and the spouse receiving the split:

In addition the letter or form should state the name and ABN for the super fund of the spouse, the financial year in which the contributions were made, and the dollar amount or percentage of contributions to be split. This letter or form should be signed by the member.

  • TFN
  • Full name
  • Address
  • DOB
  • Sex
  • Daytime phone number
  • Email address
  1. The spouse receiving the super splitting also must sign the letter or form and state they are either under 55 years old, or if they are 55 to 64 that they are not retired.

WARNING

Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.

Transition to Retirement Pensions

Before Transition To Retirement (TTR) pensions were introduced, a person had to retire before accessing preserved superannuation benefits. When they were introduced, TTR pensions were designed to be used by people who wanted to work part time but needed to supplement their employment income by drawing down on their superannuation.

Previously, people who wanted to do this had to resign, advise their superannuation fund they had retired and did not intend working again, find out that they could not manage on the income paid by their superannuation, then return to either full or part-time employment.

When TTR pensions were introduced, a new condition of release was created as long as the pension paid could not be converted to cash while the superannuation member remained working. The TTR pension was designed to allow people to continue working part-time and access a non-commutable pension. But as working part-time was not defined, a person could remain in full-time employment and access a TTR pension.

The tax and super benefits of starting a TTR pension are not as great for people under 60, and have reduced for everyone due to income earned to fund a TTR pension no longer being tax free from July 1, 2017.

There are several benefits to a person starting a TTR pension, including:

  • being paid a super pension, any tax payable is reduced by the super pension rebate of 15%
  • where a member’s super balance is made up of tax-free benefits, a portion of the pension is received tax free
  • because there is more after-tax income received by the member, the member can sacrifice a greater amount of salary or wage as a super contribution

There can be one disadvantage of this strategy depending on who your employer is. In some cases employers reduce their compulsory employer SGC contributions as a result of an employee sacrificing salary or wages as extra superannuation contributions.

Example of how a TTR pension strategy works

James Fleming, who is 55 and works for an import/export business on a salary of $90,000 a year. James has $300,000 in his SMSF, made up of $200,000 in taxable benefits and $100,000 in tax-free benefits.

He wants to increase his superannuation benefits by starting a TTR pension of $15,000 a year. This will be made up of an assessable TTR pension of $10,000 and a tax-free pension of $5,000. In addition he salary sacrifices $15,000 as an extra superannuation contribution.

Before implementing this strategy, James produced the following income after tax:

$
Salary 90,000
Tax and Medicare levy payable 23,047
Net salary received 66,953

By implementing the TTR strategy, James now has the following income after tax:

$ $
Salary 75,000
Assessable TTR pension 10,000
Assessable income 85,000
Less tax and Medicare levy payable 21,097
Reduction due to 15% pension rebate  1,500
Net tax payable 19,597
65,403
Add tax-free pension  5,000
Net salary and pension received 70,403

His after-tax income has increased by $3,450 and he is contributing an extra $15,000 a year to superannuation. If the increased after tax salary of $3,450 was made as a non-concessional contribution, the fund would be better off each year by $1,200.

Documentation and Actions Required

  1. Contact your employer to see if they allow you to sacrifice some of the salary as extra superannuation.
  2. Calculate how much salary can be sacrificed without breaching the concessional contribution limit, currently $35,000 for people 50 and over and $30,000 for everyone else, but will be $25,000 for everyone after July 1, 2017.
  3. Letter from member requesting a TTR pension commence payable at least at the minimum payment rate required.
  4. Resolution by trustee/s acknowledging receipt of request for a TTR pension and approving it for payment.
  5. Letter from trustee/s to member advising that the TTR pension will be paid and its components.
  6. Trustee/s complete ATO documentation to register for PAYG withholding tax.
  7. Trustees calculate PAYG withholding tax to be deducted and set up regular payments direct from SMSF bank account.
  8. If PAYG withholding tax has been deducted once a quarter trustee/s complete PAYG withholding statement paying amount withheld to ATO.

Warning

Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.

Self-Employed Super Contributions

The strategy of making tax-deductible self-employed super contributions is particularly applicable to people who make, or know they will be making, a large capital gain. It also applies to people who are not employed with significant levels of investment income.

For those not employed, and therefore not eligible to receive employer-sponsored superannuation support, it will be easy to qualify to make a tax-deductible super contribution. If a person’s employment income, including reportable superannuation contributions and taxable fringe benefits, is less than 10% of their total income they can also make self-employed super contributions.

If they are under 65 and only earn investment income they can make a deductible super contribution up to the concessional deductible limit. People who are 65 or older must work at least 40 hours in 30 consecutive days in the financial year they make the contribution.

This means people who earn passive investment income cannot make deductible super contributions once they reach the age of 65, unless they find some kind of paid work for 40 hours within a 30 day period.

For those who are employed the amount claimed as a deduction by them personally will depend on how much has been contributed to SMSF superannuation services by their employer including any salary sacrifice contributions. In other words if they qualify for making a self employed super contribution the total of all concessional contributions, employer SGC, salary sacrifice, and self employed, cannot exceed the concessional limit.

As a result of the changes being introduced on July 1, 2017 it will be a lot easier for someone who is employed to make tax deductible personal contributions.

Where an unexpected capital gain occurs, and a person is employed, the ability to qualify for the self-employed super contribution is a matter of luck. If on the other hand people know they will be making a capital gain, and have control over when it is made, they could delay the sale of the asset until after they have finished working and therefore qualify for the self-employed super contribution deduction.

Example of how this works

James Fleming is now 63, is looking to retire in the near future, and on a salary of $50,000 a year. In addition to his home he has a holiday house that he no longer wants. He approaches a real estate agent in April 2013 and works out that if he sells the property he will make an assessable capital gain of $100,000.

James wants to make sure that he can put the proceeds from the sale of his holiday home into superannuation as a non-concessional contribution. Realising that this must be done before he turns 65 he decides to retire at 30 June 2013. He then puts the holiday home on the market, sells it in October 2013 and makes an assessable capital gain of $110,000.

With the proceeds from the sale James makes a tax-deductible super contribution of $25,000.

If James had sold the property while still working he would have paid tax and Medicare levy in the 2012–13 year as follows:

$
Salary 50,000
Capital gain 110,000
Taxable income 160,000
Tax and Medicare payable 49,547

By delaying the sale until he is retired, and he is receiving a tax free super pension and making the self-employed super contribution, James saves approximately $26,000 in income tax.

$
Capital gain 110,000
Assessable income 110,000
Less deductible super contribution 25,000
Taxable income 85,000
Total tax payable 20,672

Also by having sold the holiday home before he turned 65 he is able to get up to $400,000 as a non-concessional contribution into superannuation fund using the bring forward rule.

Documentation and Actions Required

  1. When making a self-employed super contribution a letter should be forwarded to the trustee/s stating that the member intends to claim a tax deduction.
  2. In addition the member should complete an ATO form, Deduction for personal super contributions number NAT 71121, that can be downloaded from the ATO web site. By doing this the contribution will be classed as a self employed deductible super contribution and not face the risk of some of it being classed as non-concessional, as can occur if a lump sum payment is paid out in the same year as the contribution was made.
  3. The trustees of the fund send a letter to the member acknowledging that the contribution received is to be claimed as a tax deduction, with the date of this letter being the date the contribution was received.

Warning

Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.

Reducing Debt By Selling Assets To An SMSF

One of the greatest advantages of an SMSF is the ability of the fund to have direct investments. Where a super fund has sufficient funds, and the members have high debt levels, a super fund can buy business real property (tax speak for real estate) from the members.

The aim of this strategy is to reduce the debt payments of the members, use the increased cash flow to increase super contributions to the fund, and provide the super fund with a direct property investment that produces a commercial rate of return.

The main cost of this strategy will be stamp duty paid on the selling value of the property. In addition, there will also be extra costs incurred in having the business property valued and legal costs related to the transfer of the property.

The underlying principle of this strategy must be commerciality. In addition to a market value being paid for the property, the rent paid by the business must also be at a commercial rate and paid regularly and on time, just as would be the case if the property was rented from an independent third party.

Example of how selling a business property to an SMSF reduces debt

Michael and Mary Bosch, aged 57 and 55 respectively, who run a manufacturing business through a partnership. In 1987 the company bought the factory it operates from for $150,000 using a bank loan. There is still a balance owing on the loan of $50,000.

Four years ago Michael and Mary purchased a holiday home for $350,000 with a bank loan of $200,000. Their only other major asset is a self managed super fund that has $550,000 in total investments.

Having been worried about the inflated value of the sharemarket they sold most of the shares owned by the super fund, resulting in it having $380,000 in cash. Michael and Mary like the security of a property investment and have decided that the super fund will buy the factory from the company. A real estate agent values the factory at $350,000 and estimates its market rent is $28,000 a year.

As trustees of their SMSF, Michael and Mary have a meeting and pass a resolution to change the investment strategy of the fund to allow the purchase of the factory. In the trustees’ minutes they note that as the factory is classed as business real property the super fund under the regulations is permitted to purchase it from a related entity.

A solicitor is engaged who transfers the ownership of the factory to the super fund and draws up a commercial rental agreement between the company and the super fund for an annual rental of $28,000 a year. The legal fees and stamp duty on the sale total $18,000.

As Michael and Mary qualify for the small business retirement exemption they will not pay any tax on the capital gain of $200,000. Also as they have both reached retirement age the retirement exemption can be paid directly to them.

With the proceeds from the sale Michael and Mary pay off the loan on the holiday house. The balance of the sale proceeds is used to pay off the $50,000 bank loan and the balance of the funds are used to make non-concessional contributions.

The benefits of this strategy to Michael and Mary are:

  • their business is debt free
  • the cash flow that went to make loan repayments on the holiday house can now be redirected to the super fund as extra super contributions
  • the super fund has a steady cash flow from the rent paid by the company that Michael and Mary can use to fund tax-effective TTR pensions for them both
  • the tax deductible and non-concessional super contributions paid for Michael and Mary can be further increased due to the TTR pensions they are receiving.

One disadvantage of this strategy can be when capital gains are made and large tax bills result due to not being able to claim the small business CGT concessions.

Documentation and Actions Required

  1. Contact a real estate valuer to have the property valued and a market rent established.
  2. If needed alter the investment policy of the SMSF to make sure that it can invest directly in business real property.
  3. Once the sale to the SMSF has been completed set up a regular monthly payment from the business bank account to the SMSF to ensure no rental payments are missed.

Warning

As this strategy involves the sale of the property capital gains tax could be payable on any increase in the value over the time it has been owned. Where the owners of the business qualify for the small business capital gains tax relief the tax payable can be reduced substantially.

In addition the property being transferred must also satisfy the “wholly and exclusively” business test. This means if the property has a joint use, business and private, this test will not be satisfied. One of the exceptions is where a person must live on a property, such as a farm, the test can still be satisfied. If you are not sure if your property meets this test you should seek professional advice.

Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.

Maximising the Tax-Free Portion of a Super Fund in Times of Market Downturn

There are not many silver linings when the value of investments fall. There is one thing the trustees of an SMSF can do where their fund has tax-free benefits, the fund is still in accumulation phase, and one or all of the members can be paid a superannuation pension.

Because the value of tax-free benefits remains the same until a super fund starts paying a pension, when many investments drop dramatically in value the percentage that the tax-free benefits of the total value of the fund increases. By starting a pension when this occurs the higher percentage relating to tax-free benefits will be locked in.

Example of how to benefit from a drop in SMSF investment values

Margaret Walker who is 55, still working, and has an SMSF with a sole director/shareholder company acting as trustee. She is the only member, and over the years has built the fund up to be worth $400,000 at 30 June 2012.

She has accumulated tax-free benefits totalling $100,000. A large proportion of her investments are in mining companies listed on the stock exchange. Unfortunately due to a fear of the resources boom finishing thire value in the superannuation fund has decreased to $300,000 as at 30 June 2013.

Margaret decides to commence a TTR pension as at 1 July 2013. By doing this, the percentage of her fund that is tax free is locked in at 33.33 %, as the following figures show.

2012 2013
$ $
Taxable benefits 300,000 200,000
Tax-free benefits 100,000 100,000
Total value of fund 400,000 300,000
Tax-free benefits percentage 25% 33.3%

When the value of the shares in the SMSF increases, the value of her tax-free benefits will also increase. This will mean a greater percentage of her TTR pension will be tax free while she is still under 60, and a greater percentage of the fund can be inherited by her non-dependent beneficiaries tax-free upon her death.

Documentation and Actions Required

  1. Letter from member requesting a pension commence payable at least at the minimum payment rate required.
  2. Resolution by trustee/s acknowledging receipt of request for a pension and approving it for payment.
  3. Letter from trustee/s to member advising that the pension will be paid and its components.
  4. Trustee/s complete ATO documentation to register for PAYG withholding tax.
  5. Trustees calculate PAYG withholding tax to be deducted and set up regular payment direct from SMSF bank account.
  6. If PAYG withholding tax has been deducted once a quarter trustee/s complete PAYG withholding statement paying amount withheld to ATO.

Warning

Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.