Switching super money to save on tax

You can budget to recontribute pension payments over this and the next two financial years, writes George Cochrane.

I AM 60, with a self-managed super fund and still working, hopefully for a couple more years yet. Do you think that, with my $43,200 annual salary and $17,000 a year in dividends, it would be beneficial to start a transition to retirement (TTR) pension to stop the super money being taxed? I do realise I would have to take 4 per cent out of my super. But I don’t need the cash while I am working, so can I put that back into super? I put $150,000 in this financial year as an after-tax contribution. Also, I have a term deposit of $230,000 that I am considering putting into super. What is your advice on different types of deposits? M.G.

Yes, by all means start a TTR pension. And, yes, you can recontribute the money back into your super, where it will go into an accumulation account, separate from your pension account.

I suggest you open a second bank account within your super fund to take your recontributions and thus segregate the two. You can also salary sacrifice into this account.

Your “after tax benefit” refers to a “non-concessional contribution” (NCC), using after-tax money and paid into your super fund without claiming a deduction — that is, with no concessional rate of tax. This type of contribution is capped at $150,000 a year. However, you can “bring forward” three financial years’ worth, contributing up to $450,000 of NCC between now and June 30, 2013.

When your $230,000 deposit matures, presumably this financial year, why not contribute $190,000 into your fund and then start a pension. Including the $150,000 already contributed, you will have used up $340,000 of the NCC cap in 2010-11. You can budget to recontribute up to $110,000 of pension payments over this and the next two financial years and this money would go into your accumulation account. If you are not able to recontribute all your third-year pension payments without exceeding the $450,000 cap, just hold the excess over until July 1, 2013.

Change of shares ownership

MY WIFE and I have the same number of shares in CBA. If we transfer our shares to our joint account, will it attract capital gains tax (CGT)? Do we make a capital gain or capital loss in the year of transfer entry? B.D.

Yes, if you choose to change ownership of an asset from a single name to a joint name then, in normal circumstances, it is a change in beneficial ownership and thus a CGT event. You would then be taxed this year on any gain since you bought the shares or, alternatively, you could carry forward, indefinitely, any capital loss, to be offset against any future capital gain. Assets can be transferred, without a capital gain event being experienced, if you were to die, or be divorced — both somewhat extreme ways to avoid tax.

Complex family trust issues

WE ARE the trustees, guardians and beneficiaries of a small family trust that invests in shares. We are self-funded retirees. Our sons are listed as beneficiaries of the trust and our will stipulates that after our death they will become trustees, with the income or assets to be evenly divided between them. How can we avoid or minimise CGT when transferring shares to the surviving beneficiaries? Would the shares have to be sold and then the capital paid out? Could the lifetime of the trust be legally extended? Should any special clauses be inserted in our will? E.N.

Once your sons are trustees, they will not be bound by your will, although I would expect them to agree to divide the assets equally. The shares could be transferred out but it would be deemed to be a CGT event and they will need to be careful that all tax liabilities are transferred equally. For example, one parcel of shares might have a certain CGT liability but a parcel of the same shares, bought at a different time, would have a different CGT to pay when sold.

The lifetime of the trust can be extended if your trust deed allows it and providing it is not extended beyond 80 years. However, extending the termination date will most likely be viewed by the ATO as creating a new trust — the trust would be “resettled”. This would have CGT consequences because this would be deemed to be a change in ownership and there could also be stamp duty implications. Any tax benefits carried forward would be lost as well. It’s a complex question that should be discussed with your solicitor.

While your sons will be able to continue the trust, the chances are they will have their own priorities and needs for money and may wish to wind up the trust. Your best approach is to plan to minimise any argument between beneficiaries by ensuring they are all nominated as executors of your will as well as trustees of the trust.

Source: Business Day