SMSF Quiz - Two Hoyts Movie tickets for correct
answer.
Robert turned 60 on 29th June 2007. For financial year ended
30th June 2007 he was self employed.
On 29th June he
contributed $100K deductible contribution to reduce his capital gain tax and sold
all his shares and contributed $850,000 cash as un-deducted contribution to his
newly established self managed super fund.
On 1st July 2007, he paid 15% tax on contribution
and with the balance $935,000 ($850,000 non-concessional (tax free) + $85000
concessional (taxable)) he converted his accumulation account to pension phase
and commenced an account based pension and invested all funds in interest
earning
investments.
His only son, James, is sole beneficiary of the fund via a biding death
nomination and is the other director of the trustee company. James is a doctor and lives with his wife &
kids in a mansion in Sydney.
On 20th December 2007 Robert dies. From 1st July 2007 till the date
of death, the fund earned $40,000 interest and Robert has drawn $20,000 as a
pension from the fund.
Question: How much tax will James have to pay
when he
receives Robert's death benefit payment from the SMSF.
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Options:
1)
No tax, as most of the money is un-deducted
contribution.
Wrong: From 1st
July 2007, If you pay any taxable component to a non-dependant, the receiver
has to include the death benefit as income in his or her income tax return and
pay a maximum of 16.5% income tax on this income.
2)
$3300 ($40,000 income less $20,000 pension = $20,000 * 16.5% tax rate + medicare levy)
Wrong: This option
ignores the deductible $100K contribution in year ended 30th June
2007.
3)
$19,800 ($100K deductible contribution + $40
income less 20,000 pension = $120,000 *
16.5% tax rate + medicare levy)
Wrong: As this option
ignores the tax on $100K deductible contributions in year ended 30th
June 2007.
4)
$23,100 ($100K contribution less 15% tax of '07 year
= $85,000 + $40,000 income (pension is tax free since Robert is over 60) = 140,000* 16.5% tax rate + medicare levy)
Wrong: As this option
ignores a pension payout - please note that any pension paid to the pensioner
from 1st July 2007 is paid in % of taxable and tax free component.
5)
$14,355 ($100K contribution less 15% tax of '07 year
= $85,000 + $4,000 10% share of
concessional income - $2,000 10% share of
pension = 87,000 * 16.5% tax rate + medicare levy)
Correct: However, we wanted to test in-depth knowledge of
our readers. The correct divider is $935,000, the % of taxable component growing
in the fund and coming out of the fund as a pension will divided in taxable and
tax free component in the ratio of 85/935 and not 85/850. Hence the correct
answer is $85,000 Add 9.09% of growth Less 9.09% of Pension payment Times 16.5
% tax = $14,325
6)
17,325 (start Balance in the fund $935,000 + 40,000
Income less 20,000 pension = $955,000 less non-concessional at start 850,000 =
105,000 * 16.5% tax rate + medicare levy)
Wrong: As it considers all the growth of the fund is "taxable
component". Most of the wrong answers choose this option as this is how death
benefits were calculated Pre 30th June 2007.
7)
No tax, since James can get a pension from the
fund.
Wrong: James who is a non-tax dependant cannot get a pension
from 1st July 2007 as a reversionary beneficiary - this is another
change in the new "simple super" rules.
8) No tax, as James being sole trustee after Roberts death can pay death benefit to his mother (who Robert divorced 20 years back)
Wrong: Robert before dying left a Binding death nomination.
When a member dies, trustees do not have any discretion in payment of death
benefit.
Congratulations ! to the 8 people who got the answer right - 2 Hoyts movie tickets are being sent to them.
We were a bit disappointed with the entries to this quiz - those trustees and accountants who got it wrong - we offered to double the prize - if the solicitor who wrote their trust deed could give the correct answer - needless to add - none responded to our request - Is it the solicitors don't know or do they care less - as most trust deeds we come accross, usually have a clause "death benefit will be paid as per Superannuation Law...."
Where does that leave the trustee and their advisor? Hours of search for the correct answer...
Trust Deed. You now have access to SMSF Specialist Advisor who will answer all your technical questions online for you. Simply click the button above and start chat.