Ask Max: CGT on inherited property, non-concessional funds

CGT on inherited property, non-concessional funds, selling shares, what happens when I die?

PORTFOLIO POINT: Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. Each week he draws upon this experience to answer the questions of Eureka Report members.

This week:

  • Inherited property and capital gains
  • Concessional and non-concessional funds
  • Switching to a corporate trustee
  • Selling shares owned by multiple holders
  • What happens to my SMSF when I die?
  • Transferring property and tax liabilities

Capital gains tax on inherited property

I own a building of seven units, not strata titled, currently all rented out. I am considering either making one of the units my permanent home or alternatively building a townhouse within the grounds for my permanent home.

How does this affect CGT when I die when the complex will pass to my son? I understand that whilst all the units are rented he doesn’t pay CGT until he sells the building. How is this affected if I live in one of the units or have built a new townhouse? I understand that he only has a limited time to sell my principal place of residence to avoid CGT.

I am currently making enquiries to see if I go ahead with the townhouse, whether it could be strata titled. I assume if this is the case, there are no issues as it can be sold independently; however, what is the CGT scenario if I live in one of the units as this cannot be sold independently. Do I need to have it valued at the date of occupancy so he only pays CGT on this one unit after my death, assuming a rise in value?

Capital gains tax will not be payable by your son once he inherits the units; it will be payable once he sells them. If you move into one of the units and it becomes your residence you should get it valued at that time. After you have died your son will have up to two years to sell the unit to ensure no tax will be payable on the increase in the value from when it became your residence.

If you build a new townhouse it would make it easier for tax purposes if the property was strata titled. After your death no capital gains tax would be payable on the increase in value of the townhouse while it was your home, as long as it is sold within two years of your death.

Capital gains tax will be payable on both options open to you. If you move into a unit capital gains tax would payable when they are sold on the increase in value of the unit from when you purchased it until you moved in. If you build the townhouse, capital gains tax would be payable on the increase in value of the land that it occupied from when you originally purchased it.

Do I have concessional and non-concessional funds?

Our SMSF financial report for last year in the statement of funds quoted the same value for the vested benefit, unrestricted non preserved benefits, and the death benefit. Are any of these classed as concessional or non-concessional funds?

For you to have no preserved benefits you must have met a condition of release at some time. The three categories only mean that you have access to your superannuation now. There should be somewhere in the statements of your SMSF where it shows the portion of your superannuation that is taxable and is tax free. Your non-concessional contributions will be the tax free benefit and the taxable will be your concessional contributions and income earned by the fund.

Is tax due if we switch to a corporate trustee structure?

I am one of three trustees in our DIY super fund and effectively, its manager. Of the three members, one draws a lifetime pension. The others, my wife and son, are in the accumulation phase. The assets are not segregated. We get an annual actuarial valuation. The fund is worth about $2 million, with 75% in Australian and international shares. In both elements of the share portfolios the aggregates are under water.

Our fund manager is actively encouraging us to move from individual trustees to a corporate trustee. I understand the reasons why we might do this and the technical elements and ramifications of the change process. What I am not sure of is, does the change of trustee generate a CGT event for assets such as shares registered in our individual names, and some investments such as term deposits have an interest-related maturity date. Can the trustees for them be changed at maturity or does everything have to happen on one day?

Changing to a corporate trustee will not result in a capital gains problem for your SMSF as the underlying ownership of the shares, the members, has not changed. As long as the term deposits do not have too long a maturity date there should not be a problem with keeping the holdings in their present names. As your fund manager provides you with the administration services you should confirm that this will be OK with them.

Selling a share parcel own by multiple holders

My wife and two adult children have a parcel of Woolworths shares purchased many years ago under all three names on the one holding. My son and daughter now wish to sell their shares. My wife does not necessarily want to sell her share, but as the total numbers of shares are not necessary divisible evenly by three it makes an off market transfer difficult. How is each person’s shareholding worked out?

From what you have described the shares are owned equally amongst the three of them. This will mean each owns one third. You would divide the shares by three and if the numbers held do not work out exactly whoever is disadvantaged could be reimbursed by the others.

As long as you document the holding you could sell two thirds of the shares, your son and daughter would declare any taxable gain on their tax return, and the balance would be documented as being solely owned by your wife. If the shares are making a capital loss it would make sense to sell all of them and your wife buy back the quantity she wants on the ASX.

What happens to my SMSF when I die?

What needs to done when a trustee company’s sole director/ secretary, who is also the SMSF’s only member, is incapacitated or dies?

If the member has a power of attorney, documentation would need to be drawn up, in the event of them becoming incapacitated, so the person holding the power of attorney could take over responsibility as director of the trustee company. If there is no power of attorney the fund would more than likely need to be wound up and the members balance rolled into another fund.

If the member dies the fund would need to be wound up after the member’s benefits have been paid out. You should seek professional advice to make sure all of your estate planning options are reviewed.

Transferring property and tax liabilities

In October 2011 my husband and I transferred our personally owned commercial property into our SMSF using both of our $150,000 non-concessional limits and some of our concessional contribution limit. In July 2012 we are going to transfer the second commercial property into our SMSF, using our non-concessional contribution as payment. When we sell these two properties in the future will the money we get from the sale be tax-free in the super fund?

If the properties are sold when the fund is in pension mode no tax would be payable. If the sale takes place when the fund is in accumulation phase capital gains tax would be payable by the fund. When the sale proceeds are distributed no tax will be payable by both of you if you are 60 or older. If you are under 60 some tax could be payable on the taxable value paid out depending on how much in lump sums has previously been taken by you.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au

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