PORTFOLIO POINT: This week’s questions cover capital gains on property; SMSFs: trustees and property; and revising family trust figures.
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I bought my house in 1975. About 1994 the local council closed a disused lane and sold it to neighbouring land holders. My section, about 2.1 metres wide and 60 metres deep, increased my land holding by about 11%. If I were to subdivide part of my block and sell it, would I be liable for capital gains tax and can you tell me how it would be worked out? Does the fact that I transferred a half-share of the property to my wife affect the situation?
If you subdivide your block you will create a new asset. This new asset will be made up of two components: the part that existed when you bought it in 1975 and the part you bought from the council. For you, the old part of the block will be capital gains tax-free but the part purchased from the council will be taxable. As your wife became an owner after 1985, all of her share of the subdivided block will be taxable.
Calculating the amount of the capital gain for both you and your wife is complicated. At the very least you should engage the services of a valuer, who should be able to place a market value on the land component when you transferred the half-share to your wife.
Her capital gain will be equal to her share of the selling value of the block, less the cost when it was transferred to her, plus any holding costs. These holding costs would include a share of rates and interest if a loan had been taken out to purchase either the original house or the additional land purchased from the council. She will pay tax on half of the gain.
You will pay capital gains tax on the portion of the subdivided block that relates to what you purchased from the council. The cost of this section of the block can also include your share of the holding costs. Due to the complex nature of your situation you should seek professional advice to ensure you are not paying more capital gains tax than necessary.
I have an SMSF with two of my children as trustees. They have indicated they may want to resign and have suggested I investigate a corporate structure with my SMSF provider. I have found that this would cost about $800 and involve setting up a company and new trust deed, etc. Am I right in thinking that as this will involve a roll over from one super fund to another that will be tax-free? Are there any pitfalls in doing this?
You will need to have a company set up to take over as trustee from you and your children but won’t necessarily need a new trust deed. You would only need to do this if your original trust deed is very old and does not cover any of the changes that have been introduced in the past 10 years or so.
As you will not be transferring ownership of your super fund’s assets into a new fund there will be no tax implications of having a company take over as trustee. You will however be involved in the paper warfare of having the ownership of all of your super fund’s assets transferred into the name of the new trustee company.
We are Australian residents for tax purposes. If our SMSF buys a property in London is it liable for UK capital gains tax when we eventually sell it? The fund is in the pension phase and therefore no income or capital gains tax is payable in Australia. If there are UK taxes, can we claim them back somehow?
Also, in your answer to last week’s question about exchange gains, are you sure your advice is correct? A friend parked his money in the UK as you suggested and was hit with a tax demand from the ATO when he repatriated the money. The ATO interpretation was that he had made taxable exchange rate gains between the time he became a resident and the time he repatriated the money.
Taking your second question first, the devil is in the detail when it comes to income tax. Upon further investigation, I have discovered that capital gains tax can be payable on an exchange gain depending on how much money is in the overseas bank account.
Where there is less than $250,000 in a qualifying foreign bank account there is an election that can be lodged with the ATO to have any gain ignored. Where the amount in an account is greater than $250,000 foreign exchange gains are taxed as capital gains.
Qualifying bank accounts are credit card accounts or accounts held for the primary purpose of facilitating transactions such as an operating account. When multiple bank accounts are held you can choose which accounts will be covered by the election.
Where the exchange gain is made after more than 12 months, tax is only be payable on half of the gain. This is a complicated area of income tax legislation and before making any decisions professional advice should be obtained.
If your SMSF were to buy a property in London and it made a capital gain when it is sold, no tax would be payable while it is in pension phase. Any tax paid to UK authorities would not produce a tax refund for your SMSF in Australia.
A recent review of my family trust accounting uncovered an error “in my favour” that goes back three and four years ago. Can I lodge revisions to my trust returns going back that far? The net result will be a higher capital gain and a lower income. Assuming the revisions are allowed by the ATO, will I be able to amend the distributions declared to beneficiaries?
Most individuals are able to request amendments to income tax returns lodged up to two years after the notice of assessment was issued by the ATO. Where an individual carries on a business that was not classed as a small business entity, was a partner in a partnership that carried on a business that was not classed as a small business entity, or received a trust distribution from a trust not classed as a small business entity and the trustee was not a full self-assessment tax payer, a request can be lodged up to four years after an assessment was issued.
The ability for you to amend the trust tax return to correctly account for the capital gain and amend the amounts distributed to the beneficiaries will depend on the trust deed and how the distribution minute was worded. You will need to seek professional advice to assess whether the amounts distributed to the beneficiaries can be varied.
Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.
Do you have a question for Max? Send an email to firstname.lastname@example.org