Your Questions: How can I dispose of a property in an SMSF?
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Your Questions: How can I dispose of a property in an SMSF?

I am 70, recently widowed and planning to relocate to another city. My assets are my home, valued at about $500,000 and a self-managed super fund with a NSW property valued at $280,000 in it, together with a few thousand in cash. I need to sell the super fund property as it doesn’t bring in sufficient income to meet my legal obligations. I have three questions: (a) If I downsize my home, can I put any excess from the sale into a new pension paying stream if I have sold my SMSF property and put the funds into a non-profit fund? (b) Can I sell my SMSF property to myself so I can live in it while searching for a new home? (I understand I can’t live in it otherwise). If so what is involved? (c) In what order should I sell the properties? L.H.

You could open up a hornet’s nest for yourself if you don’t meticulously follow the Tax Office’s guidelines, so let’s take each question in order.

(a) You can make a “downsizer contribution” up to $300,000. The eligibility requirements are easily found and it looks as though you have ticked all the boxes. However, pension funds can accept earnings-related income but NOT new contributions, and the reason why remains a mystery to me. Bureaucratic folderol. Simply contribute to your new fund before starting a pension.

SMSFs are at the crossroads.

SMSFs are at the crossroads.Credit:Fairfax Media

(b) Your SMSF can sell you its property at market value but you will also need to pay transfer duty (previously called stamp duty) in NSW of $8290 for a $280,000 property, with varying rules in other states.

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(c) If you are planning to move to another city then, after consulting your tax accountant, put both properties on the market, ensuring the SMSF remains in pension mode. The extra cash will allow you to keep paying a pension until you have found your new home. I presume you have a pre-2015 allocated pension, with a deductible amount ignored by Centrelink's income test. If you move to a new super pension, the full amount will be subject to deeming, often resulting in a lower age pension but this may be compensated for by having no more SMSF running fees.

After settlement, you will know what you can afford to contribute, so convert your SMSF, by now all in cash, into the accumulation phase. Roll it over to your chosen public fund, add your downsizer contribution and start a new pension.

(d) My own question. Are you prepared to live permanently in the smaller property currently in your SMSF and not move to another city? If so, the fund should be able to transfer the property to you as in-specie lump sum payment and still remain in the pension phase providing it is only a partial commutation. NSW transfer duty remains. Also, you must first document your decision to “exercise your right to exchange something less than your full entitlement to receive future pension payments for an entitlement to be paid a lump sum”, as expressed in the ATO’s Determination SMSFD 2013/2. If so, seek advice from a lawyer specialising in SMSFs.

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My husband is 80 and I am 78 and we are currently with StatePlus drawing together about $35,000 a year. We have found we are charged for advice and product services, an amount of $2338 (my husband’s) and I am charged $2250. Rather a lot for us. Which fund would you consider a better one to change into. S.B.

An associate fund, First State Super, has not charged advice fees with their admin fees and I understand StatePlus is ceasing to automatically charge advice fees. If you want to get away from the government-owned First State group, AustralianSuper is the largest industry fund and dividing your money between its balanced option and socially aware option should give you a reasonably higher return with reasonably lower volatility.

I should point out I am increasingly concerned about the rising tariffs being imposed against each other by the two largest economies in the world, the US and China. This can only have negative consequences on sharemarkets around the world. Even balanced funds such as the one above, have 60 per cent invested in local and overseas shares, plus another 13 per cent in infrastructure assets which, if 2008-09 is anything to go by, see their values suffer even more in the event of a crisis.

My wife and I are in our late 70s and live in a four-bedroom house that is ageing. We are considering selling the property to a developer. However, we really like the area so another option is demolishing the home, sub-dividing and building two townhouses on it. We would plan on living in one of the townhouses and selling the other. My concern is I have been told there would be capital gains tax payable on the townhouse we would sell. If this is correct, what would be the base cost for the purpose of calculating the tax? R.S.

Yes, the land on which your second townhouse stands would be subject to CGT from the date you originally bought it as it no longer supports a CGT-exempt main residence. Your costs, in simple terms, would be the cost of the land and that of building the second townhouse.

Don’t do it without a tax accountant and a lawyer. Also, note that property development at a time of falling house prices is more risky than ever and I would be very wary about doing it yourselves.

I am increasingly concerned about the rising tariffs being imposed against each other by the US and China.

Addendum: A reader transferred a British pension in 2014 to an Australian “Qualifying Recognised Overseas Pension Scheme” or QROPS. In 2015, Britian introduced a law effectively levying a 55 per cent tax if these amounts are transferred out of the QROPS within five years. In a letter published August 29, I advised the reader to check if 2014 transfers are caught by the 2015 law (published information didn’t cover the question). A British adviser who has read the legislation called to say (and yes, the paper is obviously read in London!), “Earlier transfers ARE caught by the change in law”, which will be of interest to other British expats in a similar situation. I also mentioned that QROPS-related advice is often expensive and this is backed up by a recent penalty levied by the US government on an international advice firm. Google “SEC $8 million fine over QROPS advice”.

Erratum: I advised a couple operating an SMSF (reader BC on July 22) that, in the event of the death of one partner, the survivor receiving a death benefit pension has “12 months from the date of death to arrange matters”. This is correct in that the survivor’s transfer balance account or TBA (with its $1.6 million cap) kept by the ATO will not be credited with the additional assets until a year later in the case of a reversionary pension (although extra tax is incurred from the date of death, if the survivor is in excess of his or her $1.6 million transfer balance cap in the case of a defined benefit pension).

However, in most cases, where the couple have established binding death benefit nominations, the survivor’s TBA will be credited as soon as they are awarded the death benefit pension by the fund’s trustee. The amount credited will be the value as at the date of death plus accrued earnings. Why the difference? Well, we can’t blame the ATO, because its in the Tax Act (section 294-25). Probably another example of bureaucrats sneaking pedantry under the noses of parliamentarians too busy squabbling to understand what they voted for, except that it makes life so much more difficult for widows and widowers still getting over the shock of a partner’s death.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1800 367 287; pensions, 13 23 00. All letters answered.