PORTFOLIO POINT: This week’s questions include: The family trust and the family home. Non-resident status. Migrating the life savings.
Looking across the ranks of writers and contributors on Eureka Report late last year we became aware that we needed an expert who could help readers with tax, specifically tax matters as they relate to wealth management.
There is no lack of Q A services in the wider financial media, but we needed someone who could tailor such a service to the unique demands of Eureka Report’s membership.
With 30 years of experience as an accountant and financial planner, Max Newnham has the qualifications we needed, but more than this he has an excellent reputation as a campaigner on tax matters. No doubt in the months ahead Max will alert us to issues we need to take to Canberra on your behalf. We also plan to file all of Max’s weekly contributions on our website so you can check what he has to say on a wide range of subjects.
Welcome aboard, Max. – James Kirby, managing editor
Main residence exemption
I have a situation where a property was purchased by my family trust for a major renovation and subsequent use as the main residence. Costs of the renovation and mortgage interest have been claimed as a business expense offset by me paying a realistic market rent back to the trust. After four years in the house I have just sold it at a tidy profit. Can my family trust claim CGT main residence exemption?
The main residence exemption only applies to dwellings occupied by individuals as their principal place of residence. As the property was owned by your family trust the main residence exemption cannot be claimed.
I have a unit in Sydney that I bought in 1996 for about $160,000 and is now worth about $400,000. The mortgage on the unit was paid off. It was rented out for a few years, I moved in for a few years, and then rented it out again until now. I am planning to buy a detached house as my residence by taking out a mortgage against this unit, but was told that the new loan on the unit will not be tax-deductible any more.
So in case I sell the unit to fund the new house purchase, may I choose the percentage method to calculate years of renting from 1996-2010 before applying the 50% discount on the gain? If I move into the unit to live for a period, or rent it out to my relative without charging any rent, will the unit become owner-occupied for tax purposes, thus CGT-free, when I eventually sell it?
The answer to your last question is no. By moving back into the unit or having a relative live in it rent-free does not make the unit totally capital gains tax free. The answer to your other question will depend on the exact purchase date of the unit.
If you signed the contract to purchase the unit before August 20, 1996, you will be able to use the days of ownership method to calculate the exempt capital gain. Your exempt capital gain will be equal to the percentage of days that the unit was used as your residence.
If you signed the contract to purchase the unit on or after August 20, 1996, you will be forced to use the market value method of calculating your exempt capital gain. This will involve obtaining a value for the unit when it ceased being rented and became your residence. You will also need to obtain a value for the unit when you started renting it out again. The increase in value over the time the unit was used as a residence will be the exempt capital gain.
Under both methods the exempt capital gain is deducted from the total profit made on the sale of the unit. You will pay tax on 50% of this assessable capital gain.
You are right about not being able to claim a tax deduction if you take out a loan on the unit to buy a new residence. The tax deductibility of a loan is not decided by the property used for security but how the funds are used. In this case, as the borrowed funds would be used to purchase your new residence, the interest on the loan would not be tax deductible.
Are they dependants?
I have a wife from whom I have been separated (but not divorced) for many years and have lived with a lady for many years. Will either of them qualify as dependants and therefore share my super death benefit without tax being paid?
Whether a person is a dependent for superannuation purposes will depend on meeting the requirements of both the Superannuation Industry (Supervision) Act and the Australian Taxation Office. The SIS regulations regard a spouse, any child, or anyone who has an interdependency relationship with the super fund member as a dependant.
Under the SIS Act, a spouse can include a defacto and the current spouse. Under income tax regulations a former spouse is also included. The SIS Act sets out the conditions that determine an interdependent relationship. For people to have a close personal relationship they must live together, provide one or each other with financial support, and one or each provide domestic support and personal care to the other.
The income tax act places a stricter definition on the level of financial support provided. For a person to be classed as a dependant by the ATO, the financial support must be necessary and relied on to maintain a person's standard of living to pass this test.
Your current partner would qualify as a dependant but your spouse, with whom who you no longer live, may not be classed as a dependant for superannuation purposes. If your spouse is dependent on the financial assistance you provide her you could request a ruling from the ATO as to whether she will meet the definition of a dependant.
I am Australian but I have been living overseas for years. I have been declared a non-resident by the tax office and my bank has been notified I am a non-resident. I started an online business for customers in the US, which means I receive large payments into my Australian bank. Does this income have to be declared as taxable in Australia?
If you are performing the work overseas, and only using your Australian bank account to deposit the money into, it should not be taxable in Australia.
Migration and tax
We will soon be migrating to Australia from England and would like to bring our savings with us. Given the adverse exchange rate we thought we would wait a while for the pound to gain some strength before we transfer our money. We have recently been told that we will be liable to pay tax on any gains that we make via the exchange rate.
One financial adviser hinted that there was a way round being liable for this tax that was totally legitimate. He didn't want to divulge this information until we agreed to pay for his services! He would only say it was a “piece of legislation”. What advice would you give to best limit our tax liability for transferring our foreign investments to Australia?
It would appear that some financial planners in the UK are as fixated on making themselves money to the detriment of clients as many Australian planners are. As long as you sell your assets in the UK while a resident there you will not be liable for Australian tax on the gains.
If you park the money in an account in the UK until the exchange rate moves in your favour, there will be no tax payable on the increased value of Australian dollars you receive.
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.
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