A tax-free exit from a 62% single-stock holding
Robert, 68, and Anne, 66, are both retired and drawing account-based pensions from their SMSF. The fund holds $1.9 million: $1.18 million of shares in one ASX-listed bank (cost base $180,000), $300,000 in cash and term deposits, and $420,000 in diversified managed funds. Robert's pension is $1.1 million and Anne's is $800,000; they must draw about $76,000 a year as minimums but spend $110,000, funding the gap from cash. The fund carries forward $90,000 of capital losses from a 2019 sale. Last year the bank paid $38,000 of franking credits. Anne wants to sell half the bank parcel and reinvest into the diversified option; Robert says selling would 'trigger a huge tax bill' and that the bank dividend is the safest income they have. They also plan to gift $50,000 to a grandchild in nine months. There is no accumulation-phase money in the fund.
1. Calculate the tax outcome if half the bank parcel is sold and explain what happens to the $90,000 carried-forward loss.
Read the worked answer
Test the tax status first. Because every asset in the fund supports a pension, the fund's income - including capital gains on those assets - is exempt from tax.
The calculation. Selling half the parcel gives proceeds of $590,000 and a cost base of $90,000 (same average cost), a $500,000 gain, and nil tax. Robert's fear of a huge tax bill is misplaced; the exit is effectively free precisely now.
The loss. The $90,000 carried-forward capital loss cannot be applied against exempt income, so it remains stranded. It becomes usable only if the fund later earns assessable income - for example if part of the fund is returned to accumulation phase, or a pension is partially commuted back. That is not a reason to delay the sale: a stranded loss is worth nothing today, while the concentration risk is live today. If the couple later wanted to use the losses, they would need to move assets back to accumulation deliberately and accept 15% tax on subsequent gains, which is a decision to take on its own merits.
Checks before proceeding. Confirm each member's personal transfer balance cap still covers their pension (total $1.9 million against a $2.0 million general cap, but personal caps depend on when each pension commenced), and confirm the fund is not relying on the segregated method in a way that changes the exemption. Neither point blocks the sale; both should be documented.
2. Explain what the franking credits are actually worth to this fund, and why that does not justify keeping 62% of the portfolio in one company.
Read the worked answer
Value of the credits. In pension phase the fund has no tax to offset, and franking credits attached to exempt pension income cannot be used or refunded. Most of the $38,000 is therefore being wasted. The credits would only have value if the fund had assessable income, for example if part of the balance sat in accumulation phase.
Value of the concentration. $1.18 million is 62% of a $1.9 million fund. A 30% share price fall plus a dividend cut would remove roughly $354,000 - more than three years of the couple's $110,000 spending - and would hit at the same time as the income they rely on. A single bank also carries sector-specific risk that diversification cannot offset: capital raisings, margin compression, regulatory capital changes and dividend payout-ratio limits. The $76,000 minimum drawdown must be paid in cash every year regardless of what the share price is doing, which turns a paper fall into a realised one if assets must be sold at the bottom.
Reframe it for Robert. The issue is income reliability, not growth versus income. A diversified portfolio plus a fixed interest and cash allocation can be built to deliver about $110,000 a year - roughly 5.8% of the fund - from dividends, interest and realised gains, with the tax-free exit making the switch cheap. The dividend is not 'safe' because it is familiar; it is safe only if it is diversified and sizeable enough to fund the drawings through a bad year.
3. Recommend a practical transition and funding plan for the next twelve months.
Read the worked answer
1. Sell in tranches. Sell roughly $590,000 now and the remainder over 6-10 weeks if Robert needs a behavioural bridge; the sale is tax-free, so timing is about market impact and confidence, not tax.
2. Retain an income anchor if needed. Keeping around $200,000 of the bank shares gives Robert a visible income stream while 42% of the fund moves to diversified and defensive assets.
3. Build the cash buffer. Hold about two years of the net spending gap ($34,000 a year) plus the minimums in cash and term deposits - roughly $80,000-$100,000 - so nothing must be sold at a bad time and the pension minimums are always payable.
4. Fund the gift from cash. Pay the $50,000 grandchild gift from the cash allocation when it falls due, and confirm afterwards that the buffer still covers two years of drawings.
5. Diary the minimums. When Robert turns 75 his factor rises from 4% to 5%, lifting the required cash drawings; the cash buffer should be sized for that step.
6. Review the estate documents. Check that death benefit nominations are current and note the tax-free component of each interest before any benefit is paid to non-dependants - the adult children would face 17% on the taxable component.
7. Do not chase franking credits again. With no assessable income they add nothing; measure yield net of their value.