Transition to retirement requirements

[lizzie]

Hi folks

Yep - back on this subject.

Trying to find a definitive answer - ATO is vague on their website, and hopeless by phone - and SMSF Accountant is away.

Hubby qualifies for transition to retirement when he hits 55 in 2 years (pre 30/6/60).

Looks like might be made redundant in 2 years.

He's not keen to go back on the PAYE roundabout, especially in a contracting industry at his age, and we are starting a business with a boutique cropping product - first planting next week. Unfortunately, the cropping won't replace the income in the timeframe.

However - on Monday we are going to look at a commercial IP situation that is throwing off around 15% net (before tax) - or, if we outsource some of the ongoing maintenance work - around 10% net (before tax) - and would replace hubby's current income plus some.

Now - do we buy via the SMSF or outside?

We want to buy in the SMSF as not wanting to take on any more debt at this stage - and the fund has nearly enough to cover the entire purchase costs. Would need a small loan that would be paid out from takings in the first 2 years.

The question is - when he turns 55, and qualifies for transition to retirement, does he have to put any monies into the SMSF to be able to take a regular payment out ... ie ... transition the money ... or can he just take a regular payment?

We'd like to take the 10-15% as weekly or fortnightly payments.

Or - if that not possible at 55 - are we allowed to charge the IP a weekly management fee as the current owners are doing - and retrieve most of the profit that way?

I guess - the question I'm really asking is - after 55 can he self-funded retire and draw regular payments on his SMSF - or charge the IP a management fee? Prefer first option.

I know we cannot take a lump sum - and that's fine.

Can anyone with experience answer - or point us in the direction of getting a definitive answer?

We are also aware that SMSF's don't like "eggs in one basket" - so may have to use some of the profits to build up the share/cash side again - or keep some as shares/cash and take out a bigger loan - and keep the auditor happy.

Thanks

 

[Deena]

Can't really help per sae, but could you go to a super information seminar? I know GESB do these seminars. A girlfriend has just set hers up. She said if she had done it at 55 she would have paid 15% tax but if she waited till she was 60 + 1 day she could do it tax free.

 

[lizzie]

happy to pay 15% tax on (above principle) income from super ... sure bets 30% currently and a small price to pay for an extra 5 years of freedom

 

[Deena]

Yes I agree

 

[Joe D]

Lizzie

Strongly suggest you read the relevant sections of "Superannuation for Dummies" by Trish Power. Also review her website and FAQs. Then you will be well armed to sort out a TRIP with your accountant.

http://www.superguide.com.au/

 

[lizzie]

Am reading - if born before 30/6/60 can access at 55 if:

Retired
Cease employment
(thought they were the same thing - but whatever)

And must withdraw between 4-10% (but no more than 10%) of funds in the super each year ... is less than the income, but can live with that as the value will then increase each year - and hence the drawings amount.

Unfortunately all the examples are for people over 60 and/or still working so again, no definitive as yet ... will keep reading

 

[Scott No Mates]

Lizzy, isn't there some requirement that if you are falling into a TRP, then you must work a minimum of 40 hours in a month?

 

[Mr. Fabulous]

If he's not working, it won't be a TTR, it'll be an Account Based Pension, since he has met a condition of release (assuming he doesn't go back to work). The only major difference is that he can draw as much as he wants with an ABP, whereas TTR's are restricted to 10% max. Don't forget there is also 15% tax on income drawn down until he turns 60. However, you can effectively reduce the 15% to 0% using various tax minimisation techniques.

The difference between retired and ceased employment is that 'retired' means you have stopped work but not reached preservation age (the age at which you can access super) and 'ceased employment' means you have stopped work and reached preservation age (can access super).

Regarding buying property in an SMSF with the intention to pay down the debt, read the following article:

http://www.dbalawyers.com.au/ato/lrbas-repayment-loan-can-asset-left-bareholding-trust/

 

[sanj]

It sounds like you are buying an active asset/business though (if i read correctly into the whole maintenance bit etc) and that wont be allowed under SMSF rules. also, normal practice is not to own assets in a trading/active business but to lease it to a trading entity, this might be a better option and i think would be allowed provided it is on commercial terms and at market rent etc but im certainly no expert in this regard.

if im not wrong you can switch in and out of transition to retirement as well, it isnt a permanent decision like being in the pension phase.

again though im not an expert, normally leave this to people much smarter than me.

 

[dan c]

Hi Lizzie,

From previous comments I seem to remember that your hubby has his super in an industry fund? Is this correct, or has he rolled over his balance into your SMSF?

Re: your question, hubby can take a transition to retirement pension at age 55, and he can take up to 10% of his member balance as his pension for the year.

If he has retired, or when he retires, he can take an account based pension and take as much as he wants. (But it will be assessable income until he turns 60.) If he has retired, the restrictions of the transition to retirement won't be applicable, so he could take a lump sum if he wanted to. (But it would be taxable).

 

[Mr. Fabulous]

Lizzie, being a reno junkie, you should also be aware that as long as there is a LRBA on the property in the SMSF, you can't make improvements to the property. The most you can do is repairs.

 

[lizzie]

Thanks Guys - that's why it gets some confusing, Sanj ... it is an asset (property with six holiday rental lets in popular location) that contains a business (the holiday letting) ... that, according to the last 3 years figures, are returning 15% (after expenses but pre tax).

We have the option of doing the physical work ourselves - cleaning, maintenance - or outsourcing that work and still clearing 10%.

But the business and the assets aren't separated - or run/sold separately

So - I guess we are buying an asset with a business attached ... but ... surely that is the same as buying a residential or commercial IP - whereas the income is derived from the business of rental

Due to circumstances - we weren't wanting to take on more debt, especially when there is cash available - albeit in the SMSF.

So confusing! We are viewing on Monday so was wanting to know whether it's worth perusing. The vendors are after a long settlement - so plenty of time to change "buyer" details - but SMSF is our preferred option.

 

[Mr. Fabulous]

http://www.smsfessentials.com.au/strategies/smsfs-and-business-like-activities

 

[lizzie]

From previous comments I seem to remember that your hubby has his super in an industry fund? Is this correct, or has he rolled over his balance into your SMSF?

Rolled into SMSF a couple of years back ... doing better than his industry funds ever did.

 

[lizzie]

http://www.smsfessentials.com.au/strategies/smsfs-and-business-like-activities

Thanks Fab ... causing more questions than answers!

Obviously - not allowed to charge a management fee, which we suspected - but asides from that, it all gets a bit vague:

"Activities which would attract the ATO?s attention are listed and comprise those where:
? The trustee employs a family member (where they would look at, among other things, the stated rationale for employing the family member and the level of salary or wages paid)
? The trustee carries on a business that relates to an activity that is commonly carried out as a hobby or pastime
? The business carried on by the fund has links to associated trading entities; and
? There are indications that super fund assets are available for the private use and benefit of the trustees or related parties."

Would not employ a family member - even if I did the bookings, I would not be paid an income as part of the expenses. More than happy to outsource cleaning and maintenance. All profits would go back to the SMSF for hubby to draw on.

Would not be a hobby.

No links to any other entities.

No private use - 100% letting.

Clear as mud - as usual

 

[sash]

Be very vary of what is put into an SMSF....the terms is thta it has to be arm's length...and the definition is very confusing.

I too tried to understand all the details ...there are a lot of items to consider. It might be easier to define the income required and work backwards

These are the steps:

1. Determine determine the exact income you need for the both of you -lets assume 60k net. Also be very conservative with your figures because things will change.

2. Next look at your income streams
a. Super preferably in high dividend shares for top 20 companies). Lets assume that you guys have $600k in super and you pull out 5% per annum. So that will given $30k
b. Assuming that you have positive geared property lets say conservatively that will return 10k
c. The rest say comes from any side business or part-time income....another 30k.

Now based on all the income streams, you have dervied the following income:

1. Super 30k less 15% tax (before 60 contribution) - 26.5
2. Income from property - 10k (zero tax say due to depreciation
3. Part-time income - 30k less 15% tax = 26.5k

So you have a total of 63k income net.

I would be very vary of going into a Commercial enterprise as it requires a lot of work. I have seen people do this and become slaves to the business.

Given you expertise with proprty why not do very simple 2 renos a year and on sell. Assuming a 35k net profit ...that will add another 70k to income...and you can still keep part-time jobs fpr 30k per year....that is probably only 2 days a week. It will also allow you to contribute more to super so you are not depleting it early.

 

[lizzie]

Lizzie, being a reno junkie, you should also be aware that as long as there is a LRBA on the property in the SMSF, you can't make improvements to the property. The most you can do is repairs.

Hi Fab

Have been reading up on the LRBA (loan recourse borrowing arrangements) - and it's a clear as mud. Does it mean I cannot borrow to do capital improvements, or simply cannot do capital improvements at all even if done out of super fund income?

The holiday lets are bringing in a very good income as is, and is in a niche of the market, so would probably just repairs - but - if wanted to improve (ie, change a window to French doors) can we do this out of SMSF cashflow?

About to start reading

http://law.ato.gov.au/atolaw/view.htm?locid='SFR/SMSFR20091/NAT/ATO/fp81'&PiT=99991231235958

but don't expect any clear answers

 

[lizzie]

My head is beginning to hurt:

Okay - so if the SMSF sells the shares in the SMSF to fund the purchase - the CG is taxed at 15% - or 10% if owned for longer than 12 months.

Did I get this right?

"SMSFs are subject to income tax but receive concessional treatment if they are complying funds. A complying SMSF's taxable income is generally taxed at a rate of 15%, compared with 45% for a non-complying fund."

"Complying SMSFs are entitled to a CGT discount of one-third if the relevant asset had been owned for at least 12 months"

 

[sash]

You think your head is hurting now....read the penalties if you are not compliant even if it is mistake....

Personally....my believe a lot of people have jumped into SMSF's without understanding their responsilities....this is the next disaster area from a financial product view.

My head is beginning to hurt:

Okay - so if the SMSF sells the shares in the SMSF to fund the purchase - the CG is taxed at 15% - or 10% if owned for longer than 12 months.

Did I get this right?

"SMSFs are subject to income tax but receive concessional treatment if they are complying funds. A complying SMSF's taxable income is generally taxed at a rate of 15%, compared with 45% for a non-complying fund."

"Complying SMSFs are entitled to a CGT discount of one-third if the relevant asset had been owned for at least 12 months"

 

[Terry_w]

Hi Fab

Have been reading up on the LRBA (loan recourse borrowing arrangements) - and it's a clear as mud. Does it mean I cannot borrow to do capital improvements, or simply cannot do capital improvements at all even if done out of super fund income?

Your SMSF can only borrow to acquire a single acquireable asset.