![If your son is giving you income distributions from his business, he is not really paying you employment income as such.](/content/dam/images/g/u/5/b/y/p/image.related.afrArticleLead.620x350.guhgvg.png/1487673562142.jpg)
Working for a family business and confused about getting more into retirements savings? Don't forget seniors' tax perks, writes Sam Henderson who answers your questions on super.
Q: My wife and I are retired, aged 66 and 67 respectively. We have a self-managed superannuation fund (SMSF) with a total balance of about $1.43 million. We both satisfy the work test as we work part-time for our son's consultancy business. Since we began that work two years ago, there have been super guarantee (SG) contributions made quarterly to the SMSF as well as salary-sacrifice contributions last year. The SG and salary-sacrifice contributions now total about $60,000 in an accumulation account within the SMSF. As of March 2017, my son is changing the way he is structuring his business to a discretionary trust. My wife and I will receive, instead of wages (currently about $50,000 per year between us), a distribution from the trust once per year. My question is does my son still have to make SG contributions and can we sacrifice distributions that come to us to the SMSF within the current $25,000 limit as a non-concessional distribution? If we don't or can't do that, what are the tax consequences to us on the discretionary trust distribution? Bob
A: Great question Bob and it spans a number of wide-ranging issues. An employer must pay SG to employees who earn at least $450 per month. If your son is giving you income distributions from his business, he is not really paying you employment income as such, although it may relate back to hours worked in some way.
Make sure you can prove that you have met the work test (40 hours in 30 consecutive days), ideally with a pay slip which may be difficult given your description of the relationship. If so, you will be eligible to make both concessional ($35,000 this year and $25,000 from July) and non-concessional contributions ($180,000 this year and $100,000 from July).
To add some fuel to the fire, remember the first $18,200 of income is tax-free for each of you, not to mention the potential to earn up to roughly $29,000 each without paying tax under SAPTO (Seniors And Pensioners Tax Offset). You're both over 65 so are potentially eligible. There's no point in paying 15 per cent super contributions tax if you can receive the income tax-free and then make a non-concessional contribution without having to pay any tax. You really need a little advice from a good accountant who knows your full circumstances to ensure you don't pay unnecessary tax.
Q: Sam, we are both in retirement phase (over 65) and have defined benefit pensions and an SMSF. My husband's super is likely to go over the $1.6 million cap — just. We asked our advisors whether the $1.6 million is likely to be indexed in future years and were told that the $1.6 million is a one-off, ie a snapshot at June 30, 2017. Is it true that if you get your accounts totalling below $1.6 million by that date but your earnings take you over the $1.6 million in following years, there are no consequences and one will not be "re-assessed" in future years (or is that at this stage an "unknown")? In addition, if I were to fulfil the work test and my husband transferred an amount into my super (which is well below the $1.6 million), would that trigger the grandfathering provisions of the Commonwealth Seniors Health Card (CSHC)? If so, would the deeming apply to all my account-based pensions which existed before 2015 or only the new one set up now to accommodate the transferred funds? Alison
A: These multi-layered questions really open the door to seeking complete advice but I'll give you an overview of the issues here. The $1.6 million cap applies to all assets supporting a pension income stream as at July 1, 2017. So if a person is not drawing an income stream, the $1.6 million does not apply until they decide to start a pension.
If you trigger the application of the cap, any assets supporting a pension over that amount will need to be moved into accumulation mode where they will trigger a 15 per cent earnings tax and 15 or 10 per cent capital gains tax. Once the cap has been applied, the assets will be permitted to grow beyond the $1.6 million cap without being reassessed again. For example, what may be $1.6 million on July 1, 2017 may grow to $2 million by 2020 and the assets supporting that pension will remain tax-free.
The cap will be indexed for inflation and will rise in $100,000 increments for those people who have not previously triggered the cap. This ensures the cap (sort of) keeps up with the times.
With respect to the withdrawal of funds from your husband's account and the contribution to yours, yes it can be done. In practice it shouldn't affect your grandfathered account-based pension if you simply start a second account-based pension in your SMSF (although the second pension will be deemed). Your accountant will need to be across this to ensure you don't commute the existing pension and combine the assets and then restart a single pension. This is a classic mistake for losing the grandfathering and needs to be avoided, and a second pension is easy enough and inexpensive to establish. Again, good advice is essential to get this right.
These questions are answered without the full financial and lifestyle details of readers and must therefore be taken as general advice. Financial planner Sam Henderson is CEO of accounting, advice and funds management firm Henderson Maxwell. Published questions will win a free copy of Sam's book The One Page Financial Plan (Wrightbooks, RRP $29.95) – remember to include your mailing address. To submit a question, please email: superquestions@fairfaxmedia.com.au.
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