Ask Max: Your questions answered

More on SMSF compliancy for non-residents, and how to manage capital gains on overseas property.

PORTFOLIO POINT: Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. Each week he draws upon this experience to answer the questions of Eureka Report subscribers.

This week:

  • Non-residents and SMSF compliancy.
  • Centrelink pensions.
  • What is my tax liability on a UK property half-share?
  • CGT concerns.
  • Bonds and super funds.
  • Buying a ski chalet.

Non-residency

I am currently working offshore in the mining industry and will soon be approaching the time threshold of being a non-resident of Australia for more than two years. I intend to continue as a non-resident for one or two more years. I have a self-managed super fund, of which I am the sole trustee. What options are there for me to keep the fund compliant, even though I will be a non-resident for more than two years? I wish to maintain sole control over the trust’s investment activities.

If you want to keep your SMSF, the only option is to convert the fund to a small APRA fund. This is done by appointing a trustee company to act as trustee for the time you will remain a non-resident. The fee charged by these trustees is broken down into an administration fee and other costs, including accounting and audit services (for more on small APRA funds, see Bruce Brammall’s The lowdown on SAFs).

The fees charged differ between trustee companies and you should ask what the total cost will be to have the trustee company take over as trustee of your fund. In addition, depending on the investments your SMSF has, such as collectables, you will need to check whether the trustee company allows them.

Centrelink rules

My wife and I are both on full disability pensions. She is five years older than me and will be 65 in 2014. At that time, her accumulated super becomes an assessable asset, and will reduce her age pension. However, we have $70,000 more than we need to fund our living costs between now and 2014. I want to contribute this money into my super account. This will lessen our assessable assets to a level where she will not have her pension reduced. Will Centrelink be likely to accuse me of “tax avoidance” and penalise us?

Centrelink would not regard what you propose as avoidance. People are able to organise their affairs to maximise their Centrelink entitlements. This even covers giving away assets. In this situation, the gift is counted as an asset for five years, but after that it will be disregarded by Centrelink. You should ask for advice in relation to your situation, because by you taking over more of your wife’s super, her entitlement to the age pension could increase.

UK property

I was given a half-share in a property in the UK in 1973. Since then, it has provided accommodation for an elderly relative for as long as she wants it. No rent is paid, no income received, no expense claims made, and no declaration of ownership has been made either in the UK or Australia for tax, or any other authority.

When the relative moves elsewhere, or dies, I have three options:
1. To sell my half to the other half-owner (my sister who lives in the UK) if she wishes to buy at market value;
2. Both of us sell; or
3. To give my half to one, or all, of my children.

Please advise what tax liability (capital gains or any other tax) I may have either in the UK or Australia in all instances, and additionally, what costs may be involved in a transfer of my half ownership in the case of Item 3? In the latter case, what future tax liability may start accruing to the new beneficiaries?

I cannot give you any advice in relation to the tax consequences or transfer duties in the UK. There is a website that provides answers to UK tax questions that should come up on a Google search.

As you gained ownership of the property before the capital gains tax system started in September 1985, no capital gains tax will be payable by you in any of your three options. If you gave your half-share to one or all of your children, they would be liable for capital gains tax when they sold it. You would need to get the property valued at the time of the gift and half of the value would become their cost base.

CGT

Is there a way of transferring an investment property into a super fund without triggering capital gains tax? Are the rules different for an SMSF compared to a retail fund?

Capital gains tax will be payable on any gain you make if you transfer the investment property into an SMSF. If the property is a residential property, you will not be able to transfer this into an SMSF. I don’t know of any retail super funds that would take over ownership of a property. If you could, capital gains tax would still be payable.

Property tax deductions

If I use the equity in my home to get a loan and then put the money into my super as a non-concessional contribution to invest in a residential property, can I claim tax deduction from my income for the interest and expenses for the property?

There is no tax deduction allowed for interest on a loan used to make a super contribution. In addition, you could not claim a tax deduction for other property costs – the SMSF as the owner would have to claim them. You should seek advice as you may get a better tax result by borrowing and purchasing the property in your own name.

Family trusts

I have a family trust with a requisite corporate trustee. Is it possible to use the same company as trustee for a second family trust or an SMSF?

You could definitely use the company to act as trustee for a second family trust, but having it act as trustee for an SMSF would not be wise. It is a requirement that an SMSF’s investments must be kept separate from a member’s assets. Having the company act as trustee for the SMSF would make this difficult.

Bonds and SMSFs

The RBA advises that small amounts (min $1,000) of Australian government bonds can only be purchased by individuals, not SMSFs. At best, the bond can be purchased by an individual and "held in trust for" the SMSF. In the case where such a purchase is held in trust for an SMSF, is the bond part of the SMSF's assets and is the tax on the interest paid by the SMSF? Or is it still the individual's asset and subject to his or her individual tax return?

If you can attach the tax file number of the SMSF to the bond, have the money come from the SMSF's bank account, and document in the SMSF records that the investment has been made on the fund’s behalf, it will be counted as an SMSF asset, even if it is in just the trustee’s name.

Ski chalets

We purchased a ski chalet through our SMSF last year. It hasn’t been looked after for the last 20 years and needs a lot of maintenance work to attract guests and produce a good income. We would like to stay in the property out of season, to coordinate tradespeople, spring clean the property and meet the people who will manage bookings and generally look after the property. The property will be let by this management company and also directly by us on the internet. The administrators of my SMSF have advised me that this is not permissible and that we will need to stay in other accommodation when we visit.

I must admit, at first thinking, you might have a problem staying in the lodge while doing repairs. According to the ATO SMSF ruling 2008/2, you will not breach the sole purpose test, as long as you are only staying to carry out repairs and you pay a commercial rate of rent while staying there.

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.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au