Trish’s response:

Question one: Can you invest your super money in your own company?

Your first question is a popular question with business people running SMSFs.

Anyone considering such a strategy should definitely be talking to a financial adviser or accountant who knows a lot about SMSFs, but I can offer you a general response.

Generally speaking, a SMSF can invest no more than 5% of a fund’s assets in investments involving related parties, such as purchasing shares in a company owned by a fund member. Such investments are officially known as ‘in-house assets’.  Quoting directly from the ATO website:

An in-house asset is a loan to, or an investment in, a related party or trust of the fund. An asset of the fund that is leased to a related party is also an in-house asset. You are restricted from lending to, investing in or leasing to a related party of the fund more than 5% of the fund’s total assets. There are some exceptions, including for business real property that is subject to a lease between the fund and a related party of the fund…

A related party can include a company associated with a SMSF trustee/member. For more information on the ins and outs of in-house assets and related parties, you can check out an ATO SMSF ruling on in-house assets (SMSFR 2009/4 ) here.

Note: The Cooper Review (Super System Review) has recommended that all related-party investments be banned from SMSFs (see article Cooper Review: Top 10 recommendations from final report). The Government has not yet commented on this recommendation.

Question two:  If my SMSF can invest in my company, how are the earnings from this investment taxed within the fund?

Well, you’ll need to confirm the tax treatment with your tax adviser. Generally speaking however, assuming that such an investment fits within the in-house asset rules, that is, no more than 5% of a fund’s assets are invested or lent to related parties, then any earnings from such an investment would usually be considered ‘non-arms length income’. Non-arms length income was formerly known as ‘special income.

Such income is taxed at 45% rather than the usual 15% tax normally associated with super fund earnings.

For example, dividends paid to a SMSF from a related private company are often considered non-arms length income. In some circumstances, the ATO may exercise its discretion and treat such income as arms-length income, which would then be taxed at 15% rather than 45%.

Question three: I am 64 years of age. Would my pension or lump sum withdrawals from my SMSF be tax-free?

The tax treatment of fund earnings is a separate issue to the tax treatment of benefit payments to fund members. Any benefits paid to SMSF members aged 60 year or over are tax-free.

Note: Any SMSF trustee considering investments in a related party should seek independent advice on the legal and tax implications of such a strategy.

Related posts:

1. SMSF investment: Art for art’s sake
2. SMSF and property: instalment warrants 101
3. Can my SMSF buy my investment property?

Many thanks for your kind feedback on our website. We began SuperGuide in January 2009 because we believed there was a serious lack of independent information available on superannuation for consumers. We also wanted to ensure that this information was expressed in plain English, and was available free of charge.

I am an author and journalist with legal and economic qualifications and many years of experience working in, and writing about, superannuation and financial services. My business partner, Robert Barnes is an internet guru, and he oversees the technical aspects of the site and our advertising. We accept advertising in the same way that a newspaper does, so the content of our website is free of any influence from vested interests.

For the benefit of our readers, I will first explain the terms that you mention in your question:

• Tax-free component: The portion of the superannuation benefit that is tax-free when paid out to a fund member. This component usually includes non-concessional (after-tax) contributions and some pre-July 2007 benefit components.
• Taxable component: The taxable portion of a super benefit. You usually pay tax on this component if you receive the benefit under the age of 60, or the taxable component is from an untaxed source (some public sector funds).
• Restricted non-preserved benefit: A benefit that’s locked up until you leave your job. Your super benefit may include this type of benefit if you were a super fund member before 1 July 1999. You can cash this benefit when you resign from an employer who is contributing to your fund. When you resign from the employer, the benefit becomes ‘unrestricted non-preserved’ and you can access this type of benefit at any time.
• Preserved benefit: Most superannuation benefits are preserved. You can’t access this type of benefit until you reach your preservation age (at least age 55) and retire, or satisfy another condition of release (see article 12 legal reasons to cash your super).

You can also use the search function on SuperGuide to find relevant articles on the topics that interest you. Note that we have special category for self-managed super funds, called ‘DIY super’ which you can access by clicking on the link at the top of the page.

My most relevant book for SMSFs is my latest book, DIY Super For Dummies (Wiley), which along with how to set up and run a SMSF, and invest SMSF monies, also explains the different components and how they work during accumulation phase and pension phase. Another one of my books which you may find useful is: DEAR TRISH… DIY SUPER 101 Q & As (Wilkinson Publishing), which answers some of the most popular questions asked by SMSF trustees.

Other books/resources that you may find helpful as a SMSF trustee include:

• ATO publications. The ATO has also produced some publications on this topic, which I reference in my book. You can search for them yourself via the ATO website (www.ato.gov.au)
• Self-managed superannuation funds: A survival guide by Max Newnham (Wrightbooks)
• A How To book of self managed super funds by Tony Negline. Note that this book requires ongoing payments for updates, and comes in PDF form only.
• The self-managed superannuation trustee’s handbook by Peter Bishell (Wrightbooks) (not sure if still in print)
• Self Managed Superannuation Funds Strategy Guide by Grant Abbott (CCH). Note that illustrates fairly specific strategies and fairly technical.
• Superannuation Australia. A service run by Taxpayers Australia. For an annual subscription of $300-odd dollars you receive the DIY Superannuation Manual, a Quarterly Manual Update and the Superannuation Quarterly magazine. Note that the manual is generally designed for advisers and that the commentary is fairly technical.

Related posts:

1. SMSFs: What is the proportioning rule?
2. SMSFs: Can I transfer my life insurance to my DIY super fund?
3. Turning 55: Taking super, tax and timing

Many thanks for your kind words about our website.

Transforming an account in pension phase within a SMSF, to an account in accumulation phase, is known as an internal rollover, and it is treated as a commutation of the pension. If the trustees of a SMSF intend to commute a pension and roll it back into accumulation phase, then they must ensure that the SMSF trust deed permits such action, and that the minimum pension payment is (pro-rated) is made for the year. You may also need to review your actuarial certificate obligations (if any).

At the time of the commutation, the tax-free component (%) of the pension account balance remains the same, while the taxable component is the balance of the pension account (if the tax-free component is less than 100% of the pension). Where an accumulation account is already in existence, then the amounts representing the former pension components as described in the previous sentence are rolled back and added to the tax-free and taxable components of the accumulation account.

If you commute a SMSF pension, then your super account’s earnings lose their tax-exempt status. Instead of paying no tax on fund earnings, super accounts in accumulation phase pay 15% earnings tax.

Note: We are an information website rather than an advisory site, so we are not permitted to provide you with the specific steps involved in commuting a SMSF pension, but any administrator or specialist SMSF adviser can do this for you for a small fee (a full commutation costs around $350). One or more of our readers may decide to share their own experience of a pension commutation in the comments section below.

Taking lump sums from pension accounts

In relation to lump sums, some people do cash out lump sums from pension accounts, but under the rules in place since 2007, when you run an account-based pension you can take 100% out of your pension without penalty. More specifically, an individual can choose to take the minimum amount required by the pension rules, or say, 20% or even 100% of the account balance as a pension payment.

An individual may choose to take the ‘lump sum’ option in order to withdraw assets rather than cash from the pension account. The current view is that a pension payment must be paid as cash, while lump sum payments can be taken in specie (as assets).

If an individual decides to treat one or more of these payments as a ‘lump sum’ payment rather than a ‘pension’ payment, then such a transaction will trigger the commutation of the pension and hence a recalculation of the tax-free and taxable components.

Note: This response is designed to provide general information. You will need to do your own research on how the rules affect your circumstances.

Related posts:

1. SMSF pensions: You stick with the original components
2. SMSFs: Taking lump sums from accumulation account
3. SMSF pensions: How do I start one?

Stephen won gold for Australia, winning the country’s first Winter Olympics gold medal, although later, Alisa Camplin also won gold at the same Olympics, by winning the aerials event .

If the ALP and the Liberals don’t stop their silly bickering over trivial issues, they may find that the Greens win more than the balance of power in the Senate. Clearly they won’t win Government but they may receive enough of the protest vote to earn the balance of power in the Lower House as well.

Now that would be a golden Bradbury opportunity for the Greens!

What superannuation policy?

In terms of superannuation and retirement, the Greens have always been light on policy, although they were instrumental in pushing for the removal of discrimination in superannuation entitlements for same-sex couples.

The party has made only a handful of public comments on super and retirement in this election campaign including:

• Parental leave should include superannuation payments. The Greens are proposing that unpaid parental leave should be 6 months, in line with World Health Organisation guidelines. The Greens Paid Parental Leave policy would provide 26 weeks’ leave, paid for by the Federal Government, with payments made at the minimum wage, plus Superannuation Guarantee payments. See the Greens website.
• SMSFs can invest in collectibles. The Greens support SMSFs investing in art and other collectibles (see SMSFs: Collectibles remain OK investments, say all parties).
• Support for a resource tax, with tax revenue paid to a sovereign fund to invest in Australia’s future . The ALP’s resource tax is designed so that one-third of the tax revenue is used to fund the increase in Superannuation Guarantee from 9% ot 12% see article: THE SOAPBOX: Mining Resource Rent Tax: Let’s get on with it

Related posts:

1. Labor’s gone long term on super
2. 2010 Federal Election: Top 10 dunderhead comments
3. Liberals: Use super money to finance Australian infrastructure projects

I explain the background to the Cooper Review’s ban in the article SMSF Investment: Art for Art’s sake and the specifics of the recommendation in the article Cooper review: Top 10 recommendations from the report.

Outlined below are the official comments made by the two major parties, and the Greens.

What the ALP has to say:

A re-elected Gillard Labor Government will ensure that from 1 July 2011 collectables and personal use assets owned by self managed superannuation funds (SMSFs) must be stored according to new rules to prevent them from giving rise to a personal benefit.

SMSFs can continue to invest in personal use and collectable assets provided they are held according to these new legislative standards that will ensure the assets do not give rise to a personal benefit and are held for the purposes of providing retirement bene?ts. Existing assets that cannot meet these rules must be sold within five years.

Federal Labor recognises that collectables like artworks can be a legitimate asset class, providing investment opportunities for self managed retirees as well as important commercial benefits to Australia’s artists.

However, Labor acknowledges concerns over such assets attracting superannuation’s concessional tax treatment while being available for ‘personal benefit’ (for example, being displayed in the home of a super fund member).

There are currently no enforceable guidelines around how these assets can be held to prevent them from giving rise to such personal benefits.

The Government acknowledges the concern and uncertainty that arose in the self managed fund and art and collectables community following the publication of the Super System (Cooper) Review report. The Review recommended that SMSFs that are not APRA regulated funds be prohibited from investing in such assets, and that a five year transition period should be applied to existing SMSFs, during which SMSFs would be required to convert to a small APRA fund or dispose of existing collectable and personal use assets (Recommendation 8.14).

That is why it was important that the Gillard Labor Government thoroughly consider and outline its detailed response on this issue as quickly as possible.

Labor’s approach is broadly in line with the best practice artwork investing guidelines that were recently released by the Self Managed Super Funds Professionals Association of Australia (SPAA) and the Australian Artists Association (AAA).

A re-elected Gillard Labor Government will consult with industry and community groups on the details of legislation to implement these new standards.

This announcement will have no cost to the budget.

Source: 30 July 2010 Joint Media Release from Chris Bowen’s office and Peter Garrett’s office

What the Liberal/Coalition parties say:

“The Rudd/Gillard Government must immediately rule out any changes to superannuation which will run a dagger through the heart of Australia’s art sector, says Shadow Minister for the Arts Steven Ciobo.

“Like property and like shares, art is a legitimate investment asset class,” Mr Ciobo said.

“Why else would institutional investors, such as Cbus, invest so substantially in art as an asset class?

“It would be completely wrong to restrict self-managed super funds from accessing the same investment opportunities available to institutional investors.”

Mr Ciobo said the recommendation within the Rudd/Gillard Government-commissioned Cooper Review to exclude “collectables and personal use assets” from self-managed funds would be a killer blow to the nation’s artists.

“If adopted this would deal a huge blow to Australia’s artists, most of whom eke out a living as it is.

“The last thing a struggling arts sector needs is further discouragement from buying artworks.”

Source: 6 July 2010 Media Release, Liberal Party website

What the Greens have to say:

The Australian Greens believe that art works and other collectibles must continue to be legitimate investments for self-managed superannuation funds… Superannuation investments are worth almost $100 million per year to the art industry, according to the Save Super Art Campaign. The recommendation by the Cooper Review to dispose of currently owned art and the cessation of future investments means that the art industry will face potential instability and the income opportunities for artists will be put at risk.

The Indigenous art market would be greatly impacted by the Cooper Review amendments. There is a significant global market for Indigenous art, making it attractive to SMSF and therefore creating an incentive for buyers, with around 60% of Indigenous art being bought through SMSF.

The Greens believe that the benefits of the current system far outweigh the negative consequences created by the recommended changes. The amendments would ultimately result in the harm of the art industry by eliminating the incentives to buy art works and therefore decreasing the amount of art bought…

Reasons for continuing to allow collectables in self-managed superannuation funds:

• An investment can provide for both retirement savings and current-day benefits. Collectables and personal assets, such as art works, produce profitable outcomes while being enjoyed in everyday living.

• There are many advisors in the superannuation industry whose services inform trustees of obligations and regulations in the super sector. They can inform trustees of any changes that arise, and help in the understanding and management of such responsibilities.

• There are greater costs for members of SAF [small APRA fund] than SMSF. The trustee in a SAF is required to be licensed and APRA approved, and therefore receives remuneration The existing services dedicated to the education and aid of investors making the need [for a] licensed trustee redundant.

Source: “The Greens will save super art” fact sheet

Related posts:

1. SMSF investment: Art for art’s sake
2. Cooper light: tastes good for SMSFs
3. SMSFs: More money for Superannuation Complaints Tribunal

Some of the ALP’s policies have progressed since then including public support for a key Cooper Review recommendation (MySuper), and the rejection of the Cooper Review’s recommendation to ban SMSFs investing in artwork and other collectibles. If re-elected, the ALP have promised to provide a full response to the Cooper Review report by the end of 2010.

More super for everyone

The flagship superannuation and retirement policy promised by the ALP is without doubt the gradual increase in Superannuation Guarantee entitlements from the current 9% to 12% over a seven-year period starting from 1 July 2013 (9.25%) and reaching 12% by 1 July 2019. For more information on the SG increase see article Superannuation Guarantee set to jump 33%.

The key kicker in the SG policy promise is that it will be funded by a resource tax on mining profits. You may recall that the mining industry behaved like spoilt brats in squealing their distaste for the original version of the tax, which then coincided with a change in Prime Ministers.

The new Prime Minister negotiated a more palatable version of the mining tax (now known as the Mineral Resource Rent Tax), with some of the major players in the mining industry. I explain the details of the MRRT in my article Mineral Resource Rent Tax: Let’s get on with it.

No more commissions on new products

Another high-profile policy announcement that has disappeared from the headlines is the ban on new adviser commissions from July 2012. If the ALO Government is re-elected, and the announcements proceed as promised, then arguably, this ban will be one of the most profound changes to the financial advising and funds management industry – ever! The purpose of the ban of course is to improve the quality of advice, remove potential conflicts when making advice and save Australians billions of dollars from previously hidden charges.

In May 2010, I wrote in response to the Government’s announcement:

Let’s look forward and congratulate the Government for having the courage to ban commissions, even though the ban doesn’t start until 2012, and only applies to new investments rather than the mega money being creamed from investment and superannuation accounts in the form of trailing commissions, and entry/contribution fees. Although some existing commission arrangements will cease if the Super System Review’s ‘MySuper’ becomes a reality, it seems that it will take decades for the ban to wash through the entire product distribution system set up by the financial services industry.

Unfortunately, the Liberal Party doesn’t support this policy: they believe commissions have a role in the provision of financial advice.

For more information on this policy see article Financial advice: Government bans new adviser commissions from 2012.

Introduction of MySuper – a low-cost default super account

The ALP have promised to introduce MySuper from 1 July 2013. The key features of a MySuper account include:

• No entry fees
• Exit fees to be limited to cost-recovery.
• Licensed by Australian Prudential Regulation Authority, but no further special licence required. APRA will publish investment returns and costs.
• A single investment option
• Plain English reporting to members
• Rules requiring value for money super accounts or risk losing APRA licence

For more information about MySuper and the Cooper Review see article Cooper Review: Top 10 recommendations from final report.

ALP’s other superannuation and retirement policies

Other ALP superannuation and retirement policies are listed below:

• Refund contributions tax of up to $500 for those earning less than $37,000 a year. For more information see article Super tax refund for lower-income earners is a winner
• Increase age limit for Superannuation Guarantee to 74 from the current 69 years. For more information see article Superannuation Guarantee now fairer to older workers
• Retain over-50s concessional contributions cap for those with less than $500,000 in super. For more information see article Over-50s contributions cap of $50,000 now permanent, for some
• Introduction of tax file numbers as the key identifier for superannuation accounts and fund members from July 2011. This measure will help fund members find lost accounts, and expedite consolidating and switching account.
• Give the ATO a discretionary power when considering excess contributions from the 2010/2011 year. For more information see article Show mercy on contributions caps, for votes’ sake
• Relax the rules for First Home Savers Account (FHSA). Where an individual buys a house before the four year timeframe is up, the money accumulating in the FHSA can be paid into the individual’s mortgage (that is, an approved mortgage) after the four years has passed, rather than redirecting the savings to the individual’s super account. For more information see article Free cash: Renovating the First Home Savers Account
• From 1 July 2011 Australians can claim a 50 per cent tax discount for the first $1,000 of interest they earn, including interest earned on deposits held in banks, building societies and credit unions, and on bonds, debentures and annuity products. For more information see article Super alternative for some: 50% tax discount on savings products
• The Australian Securities and Investments Commission (ASIC) will permit listed entities meeting specific criteria to issue bonds to retail investors using a simplified process. For more information see article SMSFs: Moves to improve corporate bond market

Related posts:

1. Cooper Review: Top 10 recommendations from final report
2. THE SOAPBOX: Cooper declares war on retail funds and financial advisers
3. THE SOAPBOX: My top 10 super wish list for Australian consumers

If the Liberal/Coalition parties win the 21 August 2010 election, they promise that any infrastructure project approved by the Federal government will be able to issue bonds giving investors (potentially superannuation funds or retail investors) a 10% tax rebate. For retail investors, this will mean an individual paying a top rate of tax of 45% will pay only 35% income tax on the interest from the infrastructure bonds, and an individual paying a top rate of tax of 30% will pay only 20% tax on the bond interest. For superannuation fund investors, a 10% tax rebate will mean paying only 5% on infrastructure bond interest rather than 15% earnings tax.

Such bonds will be able to traded on the secondary bond market.

With a target figure of $700 billion in funding, the Liberal/Coalition parties promise to offer tax incentives to entice superannuation funds and retail investors to invest in the multi-billion dollar projects scattered around the country. Although $700 billion may be the target, the policy will only fund $20 billion in infrastructure projects, at an annual cost to consolidated revenue of $150 million. The scale and cost of the policy is likely to increase over time.

The Liberal/Coalition parties promise to beef up Infrastructure Australia, requiring it to produce 15-year plans and justify projects with publicly available cost-benefit analysis.

Related posts:

1. Labor’s gone long term on super
2. SMSF investment: Can I invest my super money in my own company
3. SMSFs lead the super pack, again

I am pleased that you found our website, and my books, helpful.

Your question contains several questions, so I will provide some background on the issues you mention for the benefit of other readers, and then answer each question in turn. Note that my responses should be treated as general information, and you need to get specific advice on your personal circumstances.

How the tax system affects super

When a super account enters pension phase, the earnings on assets financing the pension are free of tax. What this means is that capital gains, dividend income, interest income and any other type of income that the pension account receives is exempt from the tax system.

Note: If you choose to continue an accumulation account while also taking a pension from a pension account, then tax is still payable on fund earnings in the accumulation account. For example, fund earnings are subject to 15% earnings tax, although capital gains on assets that have been held for more than 12 months receive a 33.3% discount, which translates into a tax rate of 10% on those capital gains. You can also continue making contributions to the accumulation account, subject to meeting a work test if aged 65 or over.

When a pension account member dies

When a pension member dies and he or she has not arranged for a reversionary beneficiary, there is a strange quirk in the system that means the pension account reverts to accumulation phase. What does this mean for the family of the deceased? Well, it means that when the fund assets are sold, any capital gains are subject to tax before the proceeds can be paid out as death benefits to beneficiaries. If the beneficiaries are non-dependants (such as adult children), then you can expect two tax hits:

• Earnings tax on the sale of fund assets (assuming capital gains)
• Death benefits tax on payment of benefits to non-dependants

Even when the benefits are paid to dependants (and then tax-free), any tax on capital gains from the sale of fund assets is still payable in the circumstances outlined above.

Source: The source of this tax approach to fund earnings when a pension member dies, is an ATO interpretative decision from 2004, ATO ID 2004/688: Superannuation Exempt income – segregated current pension assets. The interpretative decision applies where the SMSF has a single member, the fund was paying a pension to the member, the fund member died, and the trust deed of the fund doesn’t provide for reversionary pensions or annuities to be paid (which in my view, leaves the window open for someone to challenge this decision, which is not a binding decision by the way). On the death of the member, any remaining monies are payable as a lump sum.

Quoting from the ATO decision:

“Where a fund ceases to have a current pension liability due to the death of a sole member with no contingent pension payable, the assets cease to be ‘current pension assets’ and the income is no longer exempt pension income. As a result the exemption provided for by section 282B of the ITAA 1936 ceases to apply.”

What if there are two members?

The ATO decision doesn’t deal specifically with this situation but by systematically going through the super rules it is possible to find an answer to this question. I assume that a pension account would lose its tax-exempt status on the death of the member, unless a reversionary beneficiary was in place.

Where a two-member fund is running two pensions, and each pension member is the reversionary beneficiary of the other, then the loss of the tax-exempt status would only become a problem when the last member dies.

If a SMSF pension member has nominated a reversionary beneficiary (must be a death benefit dependant – such as spouse, dependent child under age 18), then on his or her death, the pension continues to be paid to his spouse or other nominated beneficiary. In these circumstances the tax-exempt status of pension income continues because the pension has never ceased.

You ask what happens if the nominated beneficiary dies before the primary pension account holder. Again, in the situation where two pension fund members are the nominated beneficiary of each other, then the nominated beneficiary of one pension, is the primary pension account holder of the other. Accordingly, the pension of the deceased member continues to be paid to the reversionary pensioner and the tax-exempt status is retained.

What about on winding up?

If the surviving SMSF member of a couple eventually dies, and a reversionary pension is no longer in place because the reversionary pensioner passed away at an earlier date, then the pension assets for the last member revert to accumulation phase. Any capital gains arising from the sale of assets will be subject to earnings tax, albeit a 33.3 discount if held for longer than 12 months.

Note: The discussion above relates to pension assets rather than the payment of death benefits. Death benefits remain tax-free when paid to dependants under the tax laws (spouse, children under 18, financial dependants and those who had an interdependent relationship with the deceased). The taxable component of a death benefit is subject to tax when paid to non-dependants under the tax laws – this includes independent adult children.

On the treatment of death benefits, you may find the SuperGuide following articles useful:

• How can a SMSF live forever?
• Estate planning: Beware the dastardly death tax
• Estate planning: Dear Dad, Tax for everything

Related posts:

1. SMSF pensions: You stick with the original components
2. How can a SMSF live forever?
3. SMSFs: Taking lump sums from accumulation account

Trish’s response: I need to be careful that any response I provide is not taken for specific tax advice. Anyone considering tax minimisation strategies should consult with a registered tax agent, typically an accountant.

Are you eligible for SATO?

Generally speaking, any individual who has reached Age Pension age needs to work out whether they’re eligible for the Senior Australians Tax Offset (SATO). SATO is a tax rebate against tax payable on income, available to eligible taxpayers.

An individual who has reached Age Pension age (65 for men, and since Janauary 2010, 64 years for women) may be eligible for the Senior Australians Tax Offset (SATO).

If a person is eligible for the SATO, then such an individual can expect to receive a rebate (tax offset) for all or part of the income tax payable, subject to a person’s income falling within the SATO income thresholds. Some individuals can expect to pay no tax at all, or pay a lower amount of tax, compared with an individual who is not eligible for SATO. I explain how SATO works, and the income thresholds for SATO eligibility, in the article No tax in retirement because you SATO.

If your income exceeds the SATO thresholds however, then the tax bill on your income will be the same as other taxpayers earning similar income (see tax rate table later in the article).

New income test: ‘rebate income’

Note: Since the 2009/2010 financial year, reportable super contributions, such as personal deductible contributions and Superannuation Guarantee contributions are added back to an individual’s income when determining eligibility for SATO. The income test that applies to SATO (and to the pensioner tax offset) is ‘rebate income’.

According to the ATO, rebate income includes a person’s:

• taxable income
• adjusted fringe benefits (reportable fringe benefits x 0.535)
• total net investment loss
• reportable super contributions.

Personal income tax rates

The income tax rates for ordinary taxpayers for the 2010/2011 financial year are:

Source: ATO

Individuals on lower incomes may be eligible for the Low Income Tax Offset (LITO). If an individual is eligible for the maximum LITO ($1,500 for the 2010/2011 year), the effective tax bill is nil for those earning up to $16,000. The LITO gradually reduces as assessable income increases, and is no longer available when an individual’s assessable income reaches $67,500.

In relation to your question about the 30% tax rate: even where a person is eligible for SATO, the individual is subject to the same tax rates as other individuals when calculating the income tax payable. Making tax-deductible super contributions can reduce taxable income, and in turn reduce the amount of tax payable. In terms of SATO eligibility however, although SATO is a rebate that then reduces the final tax payable, making tax deductible super contributions no longer reduces income for the purpose of SATO eligibility. For more information on making concessional contributions, check out our guide, Super concessional contributions: 2010/2011 survival guide.

Related posts:

1. No tax in retirement because you SATO
2. Working longer reaps tax benefits for over-55s
3. For your convenience: Income tax rates for the 2010/2011 year

Trish’s response: Providing a specific response regarding the CGT calculation in your question will in effect be providing advice, which SuperGuide is not permitted to do. I can however offer some general comments which should help answer your question.

1. You refer to ‘capital base’ in your question, but I assume that you mean ‘cost base’. The cost base may not simply be the purchase price but can also include the cost of any capital improvements to the asset, and certain other costs incurred since owning the property. Generally speaking, the capital gain (or loss) is the difference between the cost base and the sale/transfer price.
2. The Australian Tax Office has produced a useful document on capital gains tax that covers individuals and superannuation funds. Although the publication is designed to help taxpayers complete the 2009-2010 tax return, the document provides some excellent explanations on how to calculate an asset’s cost base, how to work out the capital gain or loss, and how to calculate the net capital gain/loss if your fund has bought sold more than one asset. You can find a copy of the ATO’s ‘Guide to capital gains tax 2009-2010’ by clicking on this link. I have included three extracts (‘What is the cost base?’, ‘capital gain’ ‘capital loss’) from the ATO publication, at the end of this response.
3. If your super account is in pension phase, that is, you’re receiving an income stream from your SMSF account, then no tax is payable on earnings from fund assets financing a SMSF pension. The tax exempt treatment of fund earnings financing a pension also includes any capital gains.
4. If you have not yet started an income stream, that is, your super account is in accumulation phase, then earnings tax is payable on fund earnings, including any capital gains.
5. You mention that since you’re aged 60 or over you plan to transfer the property out of your super fund tax-free as a benefit payment. Note that you must pay the minimum SMSF pension payment in cash, rather than assets. An individual can withdraw assets as a lump sum payment. Confirm your specific payment options with the ATO or your adviser.
6. A registered tax agent, usually an accountant, can help you with your specific CGT calculations.

Two extracts from ATO publication ‘Guide to capital gains tax 2009-10’

What is the cost base?

The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. For most CGT events, you need the cost base of the CGT asset to work out whether or not you have made a capital gain. If you may have made a capital loss, you need the reduced cost base of the CGT asset for your calculation.

Elements of the cost base

The cost base of a CGT asset is made up of five elements:

1. money or property given for the asset
2. incidental costs of acquiring the CGT asset or that relate to the CGT event
3. costs of owning the asset
4. capital costs to increase or preserve the value of your asset or to install or move it
5. capital costs of preserving or defending your ownership of or rights to your asset.

You need to work out the amount for each element, then add them together to work out the cost base of your CGT asset.

Capital gain

You may make a capital gain from a CGT event such as the sale of an asset. Generally, your capital gain is the difference between your asset’s cost base (what you paid for it) and your capital proceeds (what you received for it). You can also make a capital gain if a managed fund or other unit trust distributes a capital gain to you.

Capital loss

Generally, you may make a capital loss as a result of a CGT event if you received less capital proceeds for an asset than its reduced cost base (what you paid for it).

Related posts:

1. SMSFs: Selling a property asset
2. SMSFs: Taking lump sums from accumulation account
3. SMSFs: Commercial property and borrowing

Trish’s response: Before I respond, please note that anyone considering the tax implications of a strategy or investment decision should speak to a registered tax agent, typically an accountant.

In relation to superannuation and capital gains tax (CGT), the tax payable depends on whether the super account is in pension phase, or in accumulation phase (that is, not paying an income stream/pension).

Accumulation phase

While a super account is in accumulation phase, any earnings on the assets representing that super account are subject to 15% earnings tax.

Any capital gains that your superannuation fund makes from the sale of fund assets are subject to earnings tax. The tax implications when selling a SMSF asset, such as a property investment, will depend on the length of time a SMSF owns the asset before sale.

Note: During accumulation phase, if an asset is sold within 12 months of purchase, then any capital gains is subject to 15% earnings tax. If the asset sold has been held for more than 12 months by the fund, then the fund can take advantage of the CGT discount. The CGT discount means the SMSF only pays tax on two-thirds of the capital gain. In effect, a tax rate of 10%.

Pension phase

If an individual is drawing a pension from a SMSF account, then no tax is payable on any earnings from assets financing the pension (also known as an income stream). In short, your super fund does not pay tax on investment income, including capital gains, from assets that finance an income stream.

Note: You need to be mindful that capital gains tax may be payable upon the sale of fund assets after your death, if you have arranged for any death benefits to be paid as a lump sum. If you’re leaving your super benefits to your adult children or other ‘non-dependants’ you must pay death benefits as a lump sum.

The following articles also explain how the tax rules apply to earnings on superannuation assets:

• Four must-knows about super’s tax rules
• Super tax – as easy as 1-2-3
• CGT calculations for SMSFs

Related posts:

1. SMSFs: Taking lump sums from accumulation account
2. CGT calculations for SMSFs
3. SMSF pensions: Watch out for a surprise tax bill on fund assets

Trish’s response: Reducing the amount of income tax payable, including income tax payable on net capital gains, by making concessional (tax-deductible or salary sacrificed) super contributions remains a popular strategy.

Concessional contributions will be subject to 15 per cent tax when entering the fund. Note that the annual limit for concessional contributions is $50,000 for anyone aged 50 or over for the 2010/2011 year. The contribution cap is $25,000 (for the 2010/2011 year) for anyone under 50 years of age.

A self-employed or non-employed individual can only claim deductions for super contributions against assessable income, such as salary, investment income and capital gains.

Entering a salary sacrifice arrangement (making before-tax contributions to a super fund pursuant to an arrangement with an employer) is another popular strategy used to reduce an individual’s taxable income.

Related posts:

1. Know your super limits: Reducing CGT via concessional contributions
2. Managing CGT with super contributions
3. Non-cash contributions, CGT and contributions caps