Help! The deeming rules have me foxed


Q. Can you confirm that after 1/1/2015 occasional withdrawals of cash lump sums, and increasing or decreasing the annual pension payable from a superannuation account (account based) will not trigger the new deeming rules?

Some financial writers and my superannuation fund in particular, are saying that future cash withdrawals will constitute a product change and thus trigger the new deeming rules! Further, would changing the investment nature (i.e. cash to balanced) constitute a product change and therefore trigger the new deeming rules?

I am confused!!

A. Grandfathering arrangements for account-based income streams will not be affected by partial lump-sum withdrawals, increasing/decreasing annual payment amounts or changing the underlying investments of the income stream. To lose the grandfathering entitlement, the existing income stream must cease. This would generally occur when changing product providers or commencing a new income stream with the same provider.

Q. I am in my mid 50s and after a divorce, my funds don’t stretch far, so I would like to set up a SMSF to purchase a house then rent it back to myself. Is this possible?

A. There are restrictions in the superannuation law on SMSF purchasing a residential house and then leasing the house to the SMSF members. The law states that unless the value of the house is less than 5 per cent of the total value of assets in the SMSF, it cannot be done.

Q. I have a superannuation fund in pension mode and hold a CSHC. In the last few years I have had a part-time job and have contributed to super through my employer, together with non-concessional contributions. This fund is still in accumulation mode, but in mid 2015, I will retire and will need to move it into pension mode to supplement the income from my personal fund.

Can you advise whether converting the super to pension mode after January 1, 2015 will have an adverse effect on my entitlement to the CSHC, given that I already meet the grandfathering provisions through my personal fund.

A. The pension you start after January 1, 2015 would not qualify for Centrelink income-test concessions, but the existing one would. The fact that you meet the grandfathering test for the first one is irrelevant for the second one, and the second one would be assessed under the deeming rules to determine the amount of income assessed for CSHC purposes.

Q. I am 64 and manage my own SMSF. In order to deposit $400,000 from the sale of a property and an inheritance in the next few years, I wish to qualify for the work test. I have spoken to the ATO, and based on my understanding of their definition of gainful employment, I would like to count the management of my SMSF as gainful employment. I am sole director of the corporate trustee entity, and have begun to draw down funds from the SMSF as director’s fees for this purpose. I would appreciate your thoughts on this strategy.

A. What you propose does not qualify for the work test. To qualify for gainful employment, you would need to work 40 hours in 30 consecutive days. A member of an SMSF cannot pay themselves remuneration for managing their own fund — this would be in contravention of section 17B of the superannuation law. You may also be acting illegally by withdrawing funds from the SMSF to pay yourself a director’s fee from your company. This would amount to a contravention of the payment standards under the superannuation law.

I assume your company was established solely to act as the corporate trustee of your SMSF, and that it is not a trading company. If so you cannot pay yourself a director’s fee for managing your SMSF.

Q. My wife is 55 and I am 63. We have a rundown investment property within our SMSF that is expensive to maintain. We don’t want to sell the property and would like to demolish the existing building then build a new house. Are we allowed to do this within the SMSF if we have sufficient cash in the fund, and don’t have to borrow? If that is not permitted what are our options?

A. Superannuation expert Monica Rule says there are no restrictions on using money accumulated in an SMSF to demolish an existing property owned by an SMSF and build a new property. As members of your SMSF, you must ensure you hire an arm’s-length builder to do the work as you cannot pay yourselves to do the work unless you are qualified and licensed to do so, and provide building services to the general public through your business.

Q. I gave my daughter some money to pay off the mortgage on her home, and we then had the deeds transferred to my name. If we sold the property within 12 months would we have to pay capital gains tax?

A. If the property has been used as an investment property by you, there would certainly be capital gains tax to pay if the value has increased since the date of the transfer. It’s important to liaise with your accountant because acquisition costs, if any, will be taken into account and you’ll receive a 50 per centdiscount on any CGT payable provided you have held it for more than 12 months.

From The Sydney Morning Herald here: