Most Commonly Asked Questions of 2002

Q: For clients over 65 but under75 years of age who want to contribute to superannuation:

(a) What constitutes gainfulemployment, and

(b) What proof is required toestablish this?

A:The superannuation rules define gainful employment as employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. 

There must be a genuine employment arrangement, which can be evidenced by a group certificate, invoice or other independent evidence of employment.

Q: Since July 1, 2002, people aged70 to 75 have been entitled to makecontributions to superannuation ifthey are either employed or self-employed for at least 10 hours inthe week the contribution is made.Can superannuation fund members claim a tax deduction for contributions made under this newrule?

A:No, only personal undeducted contributions are accepted. These contributions do not provide any tax deductibility and cannot be made by employers on behalf of employees.

Q: Can fund members stay insuperannuation once they havemade these contributions?

A:To remain in the accumulation phase of superannuation between 70-75 years of age, members need to be employed or self-employed for at least 10 hours in each week. If a member does not meet this test, they must either take their benefit as a lump sum or commence an income stream.

Q: What are the consequences ofstopping an allocated pension androlling the benefit back to the accumulation phase of superannuationwithin the same fund?

A:The Federal Minister for Revenue, Helen Coonan, recently announced the Government would legislate to ensure that internal rollovers from a pension fund to a superannuation fund are treated as eligible termination payments (ETPs).

As a result, clients are able to roll their pensions back to the accumulation phase of super without the risk of any adverse consequences for Reasonable Benefit Limit (RBL) purposes.

Q: What are the RBL implications of changing pensionproviders?

A:When a person rolls over a pension to another provider the Australian Taxation Office (ATO) reassesses the RBL. The ATO calculates the amount of benefit that has been drawn from the original pension. However, rather than looking at the actual income payments, the calculation considers the difference in account balances between the two pensions and makes an indexation adjustment (indexed to reflect changes in average weekly ordinary time earnings).

As a result, a person who has drawn a large amount of income or has had negative investment returns and rolls over their pension could end up having an RBL amount much greater than their actual benefit counted against them.

Q: My clients are going througha divorce and one spouse holds asignificant amount in super. Willthey be affected by the new family law rules relating to super anddivorce?

A:Yes — new family law rules became effective on December 28, 2002, and may allow married couples to split superannuation benefits on marriage breakdown.

Q: If a self-managed superannuation fund (SMSF) does not haveenough money to purchase a residential property and it wants toborrow money, can it buy theproperty as“tenants-in-common”with a member of the fund?

A:Yes. The trustee may meet a shortfall of funds by allowing another party to invest in the property. The fund may hold the assets as “tenants-in-common” with a related party, provided the property is not leased back.

Q: Can the same SMSF participate in the purchase if the member uses the property as securityfor a loan to fund their half?

A:No, the assets of a super fund cannot be used as security for a loan.

Q: Can the SMSF acquire themember’s share of the property ata later date?

A:Only if it is business real property — ie. property used wholly and exclusively to carry on a business.

Q: Can a client transfer shares ormanaged fund investments intotheir SMSF to gain access to theircapital and use any resulting capital losses without losing controlof the assets?

A:Yes. Listed shares and retail managed funds are an exception to the rule that prohibits trustees from acquiring assets from a related party of the fund.

Q: What tax issues will affect theamount of benefit my client willreceive when receiving an employer Eligible Termination Payment(ETP)?

A:ETP tax: these rates depend on whether the payment is cashed out or rolled over. If cashed out, the rates also vary depending on the size of the payment.

As an ETP, the payment will count towards a person’s RBL. The actual amount counted will vary depending on whether the payer is an associate, the length of a person’s service and if the payment is rolled over or cashed out.

Superannuation surcharge: surcharge applies to the portion of any employer ETP that relates to the period after August 20, 1996. The formula used to calculate the liability depends on the size of the payment received.

Q: If an individual makes a capital gain on the sale of an activeasset of a business and wants touse the small business CGT retirement exemption, how long dothey have to rollover the exemptamount into superannuation?

A:The exempt amount of the capital gain (the CGT component) must be rolled over to superannuation by the later of: when the individual makes the choice to use the retirement exemption and when the sale proceeds are received. The choice to use the retirement exemption must be made in writing by the day the individual lodges their tax return for the year the asset was sold. If proceeds are received after this time, then they must be paid and rolled over as soon as possible.

Peter Hogan is head of technicalservices, Colonial First State.