PORTFOLIO POINT: Super funds and anti-detriment payments. Winding up companies tax-effectively. Death benefits. Inheritance and pensions. Small business exemptions for trusts.
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
- Super funds and anti-detriment payments.
- How can I wind up my company tax-effectively?
- Doing the paperwork on death benefits.
- Mortgages and interest deductibility.
- Will an inheritance affect my pension?
- Cash alternatives.
- Are trusts entitled to a small business reduction?
I have been told that SMSFs cannot make anti-detriment payments. Is this a good reason to join an industry fund?
Anti-detriment payments are made by superannuation funds upon the death of a member as a lump sum to dependents. The amount paid increases the value of the deceased's member's balance to take account of tax paid on contributions. A super fund making an anti-detriment payment receives a tax deduction for the payment.
Anti-detriment payments can be made both by self-managed super funds and public offer funds. As such, they should not be taken into account when making the decision to either start an SMSF or join an industry fund.
Winding up a company
Some 15 years ago, my son and I formed a private company for general investment. We each hold 50 per cent of the shares. Due to my son's diligence, mainly in the equity market, the value of the company has now increased by over 20-times original capital.
At no time have either of us taken out any dividend payment and, of course, there is a fair whack of imputation credits held. I will soon turn 80 and have no need for the funds in
this company. Also, at this stage, neither does my son. However, I have another five children, am still married to the same woman after 56 years, and I do not want this company's assets to be part of my estate when I die – and neither does my wife.
If we wound it up, there will be a considerable amount of capital gains tax to pay, and likewise if he bought out my share. Am I able to gift my share to him without paying any tax? If not, are there other options?
If you gifted your shares to your son, that would count as a disposal for capital gains purposes and would result in capital gains tax being payable on the increased value of the shares. You should seek the advice of an accountant specialising in capital gains tax to assess what will be the best option for you. One of your options includes dividends streaming over a number of years.
My wife and I are both trustees and members of our SMSF and have arranged binding death benefits in the event of one of us dying before the other. However, I’m unclear as to what paperwork is required to ensure that in the event of our simultaneous deaths, our half-shares in the super fund pass to our estates. I have had some difficulty establishing exactly what needs to be done.
In the event of you both dying at the same time, there would not be a dependent left to receive your combined superannuation balances. In such a case, the death benefit must be paid to the deceased’s estates, where your wills would deal with the payment. You should seek advice from an estate planning lawyer to make sure that your wills properly handle the situation.
I currently have a family home which is mortgage-free, but I am using it as security for a line of credit to fund share investments. I am intending to buy a new home, which will become my principal residence. I will need to borrow about 50 per cent of the value of the new home. I will retain and rent out my current home. Is it possible to allocate the new borrowings to my current home, so that I can offset the borrowing costs against the rental income?
For income tax, the deductibility of interest on a loan is decided by how the borrowed funds are used. As your borrowing will relate to the purchase of the new home, and not the purchase of the rental property, none of the interest will be deductible and cannot be used to reduce any rental income.
Selling your current home could be a consideration, as more of the gain will be taxable the longer you keep it. This is because where a home has a joint usage – that of a principle residence and also as a rental property – the amount treated as an exempt capital gain is based on the period the home was used as a residence, as a percentage of the total period of ownership.
If a person, aged 90, is receiving the full aged pension; is a DVA (Department of Veteran Affairs) gold card holder; and inherits $100,000, will she lose part of her pension?
There should not be any impact on the pension, but that will depend on any other assets held. If the person in question doesn’t have any other financial investments, their deemed income would be about $147 per fortnight on the $100,000 – $3 below the income threshold at which point their pension would decrease. The assets test will only come into effect if the total value of all assets – including the $100,000, but excluding the value of the person’s home – exceeds $186,750. For non-homeowners, the limit is $321,750.
As self-funded retirees who perceive the outlook to be fairly gloomy, we have largely exited the sharemarket and now have a considerable amount of cash. But we don't know where to invest it to get a reasonable return (and at our age, we feel that property is not an option). Low interest rates have considerably reduced our income.
There are a number of investment options which deliver stronger returns than cash. A professional who specialises in portfolio construction and charges a fee for service, rather than taking commissions, would be able to provide advice in this area.
Although direct property may not be appropriate, unlisted property trusts could be an option. Two of the main providers in this area are Australian Unity and Charter Hall. Some of these property trusts are open ended and allow for regular redemptions, while others have fixed periods for redemption of investments or are wound up after seven years.
Another form of investment is pooled mortgage trusts. Some of these trusts have been operating for more than 20 years and are providing superior investment returns. Care should be taken because some of these investments have an in-built trailing commission, reducing overall return by up to 0.5 per cent if a commission-based adviser is used.
Trusts and tax
I know our trusts will be entitled to the general 50 per cent reduction in capital gains tax, but are they entitled to the 50 per cent small business reduction?
If the other small business capital gains tax exemption conditions are met, the capital gain made on the sale of active assets of a business – when distributed to a significant individual – can receive both the 50 per cent general reduction and the 50 per cent active asset reduction.
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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