SMSF withdrawal and re-contribution strategy

Discussion in 'Accounting & Tax' started by money, 24th Mar, 2019.

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  1. money

    money Well-Known Member

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    Take this scenario. Jack (76yrs old) & Jill (68 years old) have a SMSF where they both each have an account based pension being paid using 100% of their member balances. It's paying the minimum percentage allowed each year and is paid in June once a year per person. Jill is currently also working part-time.

    Jill is considering estate planning of her SMSF to pass onto her non-dependent adult child when she passes as she has a large part of her super which has a taxable component, let's say $200k. She's considering the super withdrawal and re-contribution strategy to bring this down to $0 and have it become a fully tax-free component. Based on her age the maximum non-concessional contribution she can make each year is $100k.

    My questions are:

    1. Are there a set amount of days/weeks needed to be waited for before re-contribution into the SMSF after taking the money out or can this be done asap?

    2. Does she just withdraw the $200k from the SMSF to her personal bank account and the accountant will put it down as a lump sum pension when doing the SMSF tax return?

    3. Since she's aged between 65 to 74 does she need to still meet the 40 hours worked in the past 30 days or was this scrapped from law to make concessional contributions & non-concessional contributions?

    4. Can she make use of the 2 year bring-forward rule and make the maximum $300k as a non-concessional contribution this financial year? Can she also make up to $25k as a personal tax deductable concessional contribution on top of this? (Basically up to $325k all up)

    5. Let's say she makes the $300k non-concessional contribution, this will go to the accumulation phase of the SMSF. Is it best to immediately convert this to a 2nd account based pension? Does she just write to the SMSF asking to start a 2nd pension account and the SMSF writes back saying they acknowledge the letter and will start it?

    6. Since she will have two pension accounts, does the SMSF have to pay the pension amount twice from the SMSF bank account or can the total amount of both pensions be just paid once per year to her? Also do assets need to be segregated for both pension accounts, eg. bank accounts, shares held or the accountant sorts all this out when doing the tax returns? Can the two pension accounts later be combined so it becomes one pension account?

    7. If converted to an account based pension anytime in June (eg. 1st June), I believe there's no pension payment due, is that correct? If that's the case, does that mean that next year's minimum pension payment needs to for a total of 1 year and 1 month to cover the extra month?

    8. Are there any disadvantages in doing a withdrawal and re-contribution strategy?
     
  2. Mike A

    Mike A Well-Known Member

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    As Jill is over 65 years of age she can't use the bring forward rule.

    she will need to meet the work test which is for at least 40 hours in a period of not more than 30 consecutive days to make the concessional and non concessional contributions
     
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  3. Ross Forrester

    Ross Forrester Well-Known Member

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    You will have to do it over two years - she can only contribute $125k and not incur excess contributions tax a year.

    Consider doing it on 30 June and 1 July so that the new pensions from the new contributions are easier. If you do a new pension mid way through the year you effectively need mid year financial statements.

    The documentation to withdraw, re contribute and start a new pension should all be done when it happens. Do not give your tax advisor bank statements and expect them to backdate documents.

    A pension need only be paid once a year.

    Their is no minimum waiting period for the recontribution.
     
  4. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    These questions all concern financial product advice and are not general information but specific advice. Only a person with a AFSL can given personal financial advice. I can see scope for some strategies here and would recommend you seek a SMSF savvy financial adviser for specific advice
     
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  5. money

    money Well-Known Member

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    Thanks to all who have replied in this thread.

    If there are two pensions being paid for one person, does the minimum pension amount for each pension needs to be paid separately? For example Jill has two $100k pension accounts therefore the $5k needs to be transferred to Jill two times or can $10k be transferred once to satisfy the minimum pension payment?

    Also can the two pension accounts be combined so it becomes just one pension account to make it easier?
     
  6. Ross Forrester

    Ross Forrester Well-Known Member

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    Sometimes two pensions is a good tax strategy.

    It is typically easier accounting if the pensions are paid as seperate transactions - but not critical.
     
  7. money

    money Well-Known Member

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    I can't think of what benefits would two pensions would give? They would be tax-free pensions at that age anyway and not required to be declared in the personal returns of that person.
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    There can be a fatal issue with combining pensions. Good SMSF advisers know that "pension resets" can do more harm than good to tax elements - often. It can also affect Centrelink assets tests. There can be very sound reasons to keep 2 pensions based on taxation elements. eg Pension 1 is all tax free and pension 2 is all taxed elements. And there may be a strategy for Pension 2 to be reversionary to a spouse where Pension 1 is not and goes to the estate.

    If that all doesnt make sense its probably just the tip of the iceberg.

    I would recommend Grant Abbotts book :
    The Guru's Guide to Self-Managed Super Funds
     
  9. Ross Forrester

    Ross Forrester Well-Known Member

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    Ditto to this. Nailed it.
     
  10. money

    money Well-Known Member

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    Just thinking about this "over two year" strategy, Say that the SMSF only has $125k in available cash because the rest is in shares or property, can she get a $125k pension just before the end of June then contribute $125k into the SMSF on or prior to 30th June, then on the 1st of June take another $125k pension then on the 2nd of June contribute another $125k into the SMSF? In effect it's the same $125k money being moved around 4 times.
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Answering this question would be personal financial advice. Must be licensed and give regard to more information.
     
  12. qak

    qak Well-Known Member

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    You would want to think about why put in the $25K concessional contribution. (1) That could create another account with a blend of taxable/tax free balances - you could do them on different dates and create new separate pensions for each contribution. (2) Depending on her taxable income, she could inadvertantly be making an excess NCC.

    And I'm not sure from your OP if you understand that if the taxable component of her balance is $200K, she can't take out 'just' taxable component - all withdrawals will be allocated proportionately to all the components.
     
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  13. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Those are just some of the issues. Age, total all of super caps, taxable income/s and many other factors. And some funds cant pay complying pensions too. The deed may be outdated. Client specific advice and strategies are required.
     
  14. Ross Forrester

    Ross Forrester Well-Known Member

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    A pension paid must be done in cash. The contribution into a fund only looks at the quantum of the contribution - not the original source. So a super contribution from wages, rent, lotto winnings or prior pension income is the same tax treatment for the contribution within the super fund.

    Some extreme exceptions and always part Iva but generally ok. The recommendation of which bank account to withdraw and use (bank fees interest etc) should should be done by an investment advisor.

    Check the deed but would be surprised if not allowed - still check.