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Capital gains tax on corporate trustee transfers, related parties, and resident vs non-resident tax treatments.

Summary: This article provides answers on whether capital gains tax is payable is transferring assets from an individual self-managed super fund to a corporate trustee, the definition of related parties for the SMSFs, and the best tax strategies for a resident and non-resident couple when purchasing property.
Key take-out: If there is no change in beneficial ownership of investments when transferring them to a corporate trustee, no capital gains tax event has occurred and no tax will be payable.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Is CGT payable when changing investments over to a corporate trustee?

My wife and I have a small SMSF, with both of us acting as individual trustees. This was done to save money at the time of establishment of the SMSF. Now that our position is evolving, the SMSF is growing, there are multiple investments, and my wife is not especially investment focussed, we would like to change to a corporate trustee and probably bring in one of children as trustee/director.

My dilemma is that one of the banks has advised changing to a corporate trustee will require closing existing accounts including term deposits and opening new accounts under the corporate trustee. If this advice is correct, then it may follow that our shares also need to be transferred to a new corporate trustee and maybe triggering CGT while also incurring transfer fees. Is the advice correct?

Answer: You are not alone when it comes to having set up your SMSF with individual trustees to save money. Up until several years ago I had thought I was doing my clients a favour by recommending exactly the same thing. Although having individual trustees does not mean the fund must be wound up when a member dies, having a company act as trustee provides a lot better long-term solution.

If the bank is stating that you must open a new account in the name of the new corporate trustee you may have very few options. Before opening this new account you should consider what sort of the deal your current bank is giving you, and look at whether or not you will be better off opening a cash management account with another bank. These CMAs often pay reasonable interest rates and come with a cheque book, deposit book, and have access to electronic banking facilities.

You will also need to change the registered owner of all of the investments held by your SMSF. It should not really be necessary for you to cash in the term deposit before it matures. If your bank is demanding that you do this you should seriously consider looking for a new bank. I know of no reason why you should not be able to keep the old bank account open, with the proceeds of the term deposit banked into that, and then that account closed with the funds being transferred to the new account.

The changing of the registered owner for the investments should all be able to be done as off market transfers and, because there is no change in beneficial ownership of the investments, no capital gains tax event has occurred and no tax will be payable. This should also mean that transfer fees should be minimised. If the current accountant for your SMSF is not able to help you with this process you should look for one that can.

What is the definition of a related party for a SMSF?

I noticed a recent question from the couple that wanted to buy their daughter’s unit to add as an investment strategy at market value. Your answer was that this would break the related party rule that applies to the acquisition of assets by a super fund. Are you assuming the daughter is a member of the SMSF fund, as I understood that a related party in those circumstances was a member of the fund or any entity controlled by a member of the fund?

Answer: The definition of a related party, when considering the ban on an SMSF buying investments from members or related parties, is very broad. It not only includes companies and trusts controlled by a member but it also includes their relatives. This being the case the daughter of the couple in the question is definitely classed as a related party and the SMSF could not buy the unit owned by her.

Tax strategies for buying property as a resident and non-resident.

My wife and I are Australian citizens who left Australia in 1981 and don’t have tax file numbers. We recently bought an apartment off the plan in my wife’s name as our retirement home. When the apartment is built and delivered next year my wife will retire and “live” in Melbourne while I’ll continue to work for another five years in Hong Kong before relocating to Australia for good. The joint bank accounts we hold in Australia are designated as non-resident and therefore 10% withholding tax is deducted from all interest income.

Our plan is to purchase one or two more investment properties in Melbourne so that we can live on the rental income. Should the investment properties be purchased solely in my wife’s name? When my wife becomes an Australian tax resident, should we terminate the joint bank accounts so that we can be taxed separately? Will I be deemed to be an Australian tax resident when she becomes one, even though I don’t stay more than two months per year in Australia? When I eventually become an Australian tax resident will all the income arising from my overseas assets be subject to Australian tax and can I prevent this from happening?

Answer: One of the first things I recommend that you do is to seek professional advice in relation to whether investing in rental properties will be your best option to produce an income in retirement. If you are both under 65 you should seriously consider contributing to a superannuation fund that would then produce the most tax effective income for you in retirement.

While you are both still classed as non-residents you would need to become a member of either an industry fund or a commercial fund. If you are over 64 you could still make contributions to a super fund as it appears you could pass the 40 hour work test in a continuous 30-day period,

If what you decide is still to buy the rental properties, and you are still a non-resident for Australian income tax purposes, it would be best if the rental properties are put in your wife’s name. This is because if they were purchased in your joint names any rental income earned would have the higher non-resident income tax rates applied your half share.

Depending on what the taxable income is for your wife after she has become an Australian tax resident, which if she had contributed to a super fund and she is 60 or older she would not be receiving any taxable income from the super fund, she may be paying little or no tax on the interest earned by your bank account. If this is the case it would make sense to have an account in just her name. If, however, she would be paying tax at even the 19.5% tax rate on the interest earned it makes sense to have the account in just your name with only the 10% withholding tax being paid.

If you are still maintaining a residence overseas, which is separate to the property purchased in Australia that your wife will be living in, you should not be classed as a resident for Australian income tax purposes just because your wife has become a resident?

When you eventually become an Australian resident for income tax purposes you will be taxed on your worldwide income including your overseas investments. You will however receive a tax credit for any taxes paid overseas. Given the complicated nature of your financial situation you should seek professional advice from a fee for service professional before making any decisions.

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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