Ask Max: Your questions answered

Rural land in a SMSF, non-concessional contributions after 65, and more.

Summary: This article provides answers on passing on rural land owned by a SMSF, sharemarket investing, Centrelink’s treatment of cashed-in life insurance funds, non-concessional contributions made after age 65, and whether capital gains tax is payable on a former residence.
Key take-out: Centrelink counts the surrender value of life insurance policies under the assets test for age pension assessment purposes.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation and tax.

Passing on SMSF rural land to a child

My husband and I are 79. We hold land worth about $600,000 in a pension fund with our son and daughter-in-law. We have the largest portion of the value of the fund. Our son pays rent every year and this funds our pension. What is the most tax-effective way to pass this on when we die?

Answer: With the land being owned by your SMSF it must be classed as business real property such as a factory, shop, or an office. For it to be purchased by your super fund it must have been used wholly and exclusively by one or more businesses. This means, in most cases, the property cannot have a private use component such as a shop with a dwelling above it.

The only exceptions to this ban on private usage of business property are for special industries. An example of this would be a farm, where a residence is a part of the farm and the area it occupies does not exceed two hectares.

As to how the land can pass to your son in the most tax-effective way will depend on how the land came to be owned by your SMSF. If the land was purchased with taxable benefits, this would mean when the land passes to your son upon your death, tax would be payable at 16.5% of its value. If the land was purchased with tax-free superannuation benefits no tax would be payable when it passed to your son.

The only thing you can consider if your superannuation fund is 100% taxable is at some point in the future to sell the land to your son and have him borrow to pay for the land. You could then take out a tax-free lump sum and give this to your son so that his interest cost on the borrowing would not be more than the rent currently paid. Before doing anything you should seek professional advice to make sure that that family’s interests are looked after.

Investing in the sharemarket

I am a new member of Eureka Report and was wondering if you could give me some advice. I have close to $50,000 that has just finished from a term deposit. I was looking at investing in the sharemarket in the short term, six-12 months. I’m not sure where to look and was wondering what you would do with the cash?

Answer: Given that I am now over 60 and can access my superannuation tax free I would be putting the money into superannuation. As to what you should be doing is a very different matter. Before making any investment you need to consider how long you will be able to invest the money for, what risks you are prepared to take to chase a higher return, and how tax effective you want the investment to be. You should seek advice from an advisor that charges a fee and does not take commissions so that your full financial situation can be taken into account.

Centrelink’s assets treatment of life insurance policies

For many years now I have had a life insurance policy with AMP that has two types of values. One that upon my death will pay out a lump sum benefit to my estate, or another lesser amount should I withdraw from the plan before then. How will Centrelink treat that withdrawal benefit? Is it treated as an asset for its calculation purposes from the day I apply for the aged pension or will it only come into play if and when I withdraw from the plan?

Answer: Centrelink counts the surrender value of life insurance policies under the assets test. As no income is produced by a life insurance policy, and because it is not classed as a liquid asset for deeming purposes, the amount of age pension you receive will not be affected by the income test applying to the life insurance policy you own.

This will mean when you apply for the age pension the value of the policy will be counted in the assets test, and if its value means that you exceed the lower asset limit, the pension payable to you will reduced by $1.50 per fortnight for every $1,000 over the threshold. The threshold for single home owners is $192,500 and is $332,000 for single non-homeowners. The threshold for couple homeowners is $273,000 and $412,500 for non-homeowners.

If the amount of age pension you are entitled to is reduced by the life policy you should consider cashing it in, just prior to you reaching age pension age, when the difference between its full value and the surrender value should hopefully be less. You should seek professional advice as to when this will be your best option and where this money should be invested after the policy has been cashed in.

Making a non-concessional contribution after 65

Can you confirm if a non-concessional contribution to our SMSF in my wife’s name can be made between the actual day she will turn 65 and the end of this financial year? My wife has not worked during the year. Her birthday is in May and the planned non-concessional contribution is to be made after her birthday and before June 30th.

Answer: As your wife has not worked during the year, for at least 40 hours in a continuous 30-day period, she will not be able to make any contributions after she has turned 65. If, however, the non-concessional contribution was made prior to her turning 65, even if it is a few days before her birthday, she could make a contribution of up to $450,000. To be able to contribute $450,000 would depend on her not having exceeded the $150,000 non-concessional limit in any of the three previous financial years.

Capital gains tax on an apartment

My partner bought an apartment in October 2008. However she did not move in until the tenants moved out in February 2009 as her main residence. Then she moved out in February 2011 and is renting out the apartment. When she sells the apartment will she be exempted from CGT in full or partially? How is CGT calculated? Is it based on her income tax bracket?

Answer: If your partner is regarded as having a new main residence, capital gains tax will be payable when she sells her apartment. If she is living with you in a property that you own it would more than likely be regarded as her main residence as well. If, however, you are living in rented accommodation she could still regard the apartment as her main residence for up to six years while she is renting it out.

If she does have a new main residence she will have to pay capital gains tax on a portion of the profit she makes when it is sold. How much capital gains tax will be payable would depend on the method used by the Tax Office. More than likely capital gains tax will be payable on the increase in the value of the apartment from when she ceased living in it. You should seek professional advice before making any decisions in relation to this apartment.

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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