PORTFOLIO POINT: Selling the family home and CGT, tax implications of selling out of a business and various aspects of SMSFs.
Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. It’s that experience working with private investors that has led to the Ask Max column, to provide expert advice to Eureka Report subscribers. – James Kirby, managing editor
- Family home and CGT.
- I’ve sold my half-share of the business.
- My high SMSF fees.
- I’m switching to another SMSF.
- My wife’s super contributions.
My father owns (well, the bank does) his house, the family residence. It was purchased in 1977 and has remained in his name since. There are three rental flats attached to the property. Will its sale attract CGT? The property will be the vast bulk of his estate, so I'd like to know how the timing of its sale after or before his death may affect taxation.
If the flats are sold by the executor of the estate, because they were purchased by your father before September 1985, no capital gains tax will be payable by the estate. As a result the flats do not need to be sold before your father dies. If the flats were transferred to beneficiaries of the will, instead of being sold, they would transfer at their market value at that time and capital gains tax would be payable when they are sold.
Selling my share
I co-founded a small business five years ago, with a company structure. I have recently sold my half-share to my business partner. Would it be correct that the capital gains are eligible for the normal 50% discount for a 12 month holding and then an additional 50% small business concession, so effectively only 25% of the profit is taxed as income?
The small business capital gains tax concessions can apply to company shares. In addition to meeting the other small business tests, shares in a company can be classed as an active asset if 80% or more of the market value of the assets of the company is made up of active assets.
Active assets include business property and goodwill. In addition, any cash the company has that is used in connection with the running of the business is also included as an active asset for the 80% test.
The first way of qualifying for the concessions is if the business is classified as a small business entity by it having an annual turnover of less than $2 million. If the business turnover is more than this the shareholder cannot have more than $6 million in net assets. In addition, they must be a significant individual by owning at least 20% of the shares in the company.
From what you have said, you will get the 50% general discount. To qualify for the small business concessions, you will need to pass the 80% test and the company will either need to be a small business entity or you have less than $6 million in net assets.
Over the years I have had accountants that simply sent me a bill without any detail to it. On this occasion, I got my present one to set up an SMSF. The expected annual running costs were to “start around $1700”. The first year I was billed $3000. I realised that I had submitted a disorganised mess. The repeated calls from his overworked assistant told me this. So, I set to and seriously cleaned up my act. Again my bill was $3000. The starting asset value of the fund was $230,000, hasn’t increased and my trading was less this time around. What questions do I ask, to see whether I am getting value for money? Passively accepting this situation is not an option.
On the basis of the value of your super fund and the fee being charged, your SMSF administration costs are high. Two of the main determinants of the cost of accounting fees should be the skill level of the person and the time it takes to do the work. You should ask your accountant how much time it took to do the first year’s accounts compared to the second year.
In addition, you should ask the accountant for a firm quote, even if it is a range of costs, to do next year’s accounts. Depending on the answers given for the time taken to do the two year’s accounts, the quote given for next year’s accounts, and possibly other quotes you get, will determine whether you should stay with your current accountant.
I am about to go to Transition to Retirement (TTR) in my SMSF, which hopefully will be straightforward (have a new deed that explicitly allows it). There are two of us in the fund – one is the other director of the company we use to do business and which pays into the super fund. As he and I are increasingly seeing less of each other (he is going to move cities), I plan to set up another SMSF and roll my funds into it by June 30.
I had thought that when I converted the shares to cash to roll over the money, there would be no CGT implications because the fund was no longer paying tax, but someone told me that despite the TTR status, the rollover sales would trigger CGT. Is this correct? If it is correct, how far out from the rollover would sales of shares trigger the CGT even though in TTR?
There should be no capital gains tax payable if you sell the shares while the SMSF is paying the TTR pension. Once the shares are sold you can commute the TTR pension and then transfer your super account to the new SMSF.
Our SMSF had a good year last year, resulting in almost $48,000 being allocated to my wife's account. Does this form part of her $50,000 allowable annual contribution? We are both retired. All of my income comes from an allocated pension but my wife owns a retail shop worth about $250,000, which produces income of about $20,000. Is it possible to transfer this to the super fund, and would this be sensible as because of her age she does not pay tax?
The amount of income distributed to a super fund member has no effect on the amount they can contribute as deductible concessional contributions or after tax non-concessional contributions. It would not be sensible making a concessional contribution for your wife as contributions tax of 15% would be payable, while she would not be paying tax on the income. It may be better to make the $20,000 as a non-concessional super contribution.
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