Installment Warrants Birthday Party and Answer to our quiz

Answer to our Quiz

Strangely, our simple quiz did not get one correct answer; we thought our situation is common with so many SMSF members in allocated pensions, who are currently over 60 and have met the ATO's trigger event. Since Jack is over 60, his fund has to complete its crystallization process by 30^th June 2008. (For quiz read below)

The change in rule, is that, earlier all pension payments were according to the old rules of UPP component each year, which the pensioner claimed each year as a deduction. However from 1^st July 2007 proportioning rules apply and all funds have to work out taxable and tax free components of the balance of the fund as on 30^th June 2007 if the trigger event happens. This amount is calculated by re-calculating unused UPP as on 30^th June 2007 and adding to it any Pre 1983 component and re-classifying it as "Tax Free" component.

If your trust deed does not require you to crystallize the balance of your fund, this is opportunity to request your client to update, we urge you to read our update module on how you can keep your clients trust deed up to date with our unique 5 year unlimited update service for only $165, to read more click here.

Further all income and all pensions have to be allocated in the percentage between taxable and tax free components as on 30^th June 2007. Any Tax Free component paid to non-dependants, on death, does not attract any tax. Please note non tax-dependants cannot be reversionary beneficiaries.

The correct answer is $37,500 and worked out as below

	Undeducted	Post 1983	Total
Start of Pension as on 1st July 07	500,000	250,000	750,000

Pension withdrawals - 10 years	-200,000	-150,000	-400,000

growth in 10 years		+200,000
Balance after 10 years - 30th June 07	300,000	300,000	600,000

1st July 2007 Crystallization	50%	50%

	Tax Free	Taxable

Loss in the year 30th June 2008	-25,000	-25,000	-50,000
Pension withdrawal	-25,000	-25,000	-50,000

Balance on 30th June 2008 at the time of death	250,000	250,000	500,000

Ronny's tax 15% of taxable component		37,500

For ATO's explanation click here

For part 2 of question, all Jack has to do is commute his allocated pension and keep the money in his bank account outside of super - on death all the money will go to Ronny.

This example was to show that superannuation is a good place to park money when you are in good health and over 60, as income in the fund is tax free and all withdrawals are tax free. However, if you have adult children (no tax dependants), superannuation may not be the best investment vehicle.

Super Co-Contributions Increase