Ask Max: Your questions answered

What to do when you inherit a property, plus the tax implications of working overseas.

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:

  • How to minimise tax when inheriting property.
  • SMSFs and working overseas.
  • Part pensions.
  • How often should I get my investment property valued?
  • I’m moving to Singapore for work – where will I pay tax?
  • Receiving pensions from overseas.

Inheriting property

I am holding an Australian permanent resident visa for around five years now ( I still have Malaysian citizenship). A year ago, I was told by my grandparent that they have made a will, which is to pass on one of their houses in Malaysia to me. Being a resident in Australia with a full-time job paying the highest tax bracket, am I subject to pay any tax in Australia when I inherit the property in Malaysia? If so, please advise what is the best solution to avoid or minimise the tax?

When you inherit the property, no tax will be payable by you at that point. When and if you sell the property, tax could then be payable by you. The amount of tax payable will depend on when your grandparents purchased the property.

If they purchased it before September 20, 1985 you will be deemed to have acquired the property at its market value when they die. If it was purchased after September 19, 1985 the purchase price paid by your grandparents will be your purchase cost.

When you sell the property, half of the difference between the purchase cost and what you sell it for will be added to your taxable income in that year, if you hold the property for at least 12 months. You could look at keeping the property until your retire, when your income would be considerably less, and any tax payable would be reduced.

An alternative would be to maximise your salary sacrifice super contribution in the year you sell the property, to try and have as much of the gain as possible taxed at a lower rate. Another option would be to reduce your taxable income in the year the property is sold by having an investment property that you pre-pay the interest on for the next 12 months.

Offshore income

I am a 61-year-old Australian and for the last three years I have been working overseas for an Australian-based Christian mission organisation. I am paid an allowance only, which is counted as Australian income but remitted to my country of service, along with funds for the work.

I declare this as Australian income, but it is below the tax threshold. My wife and I normally return to Australia for a few months (at least) every two or three years. Does this jeopardise my SMSF where I am the sole director of the trustee company?

The rules relating to where a trustee, or in your case the director of a trustee company, lives are strict and very narrow. To avoid the risk of your SMSF being made a non-complying fund, you should spend no more than two years living overseas and on your return visits spend at least 28 days in Australia.

If you can’t change the requirement for you to be away for up to three years, you should have a contract in place that states your absence is temporary and for a set period of three years. If you are still maintaining a home here, and no contributions are made to the fund while you are absent from Australia, there is a chance you will pass the test. To be sure, you should seek a ruling from the ATO fully setting out the facts.

Part pensions

I receive a ComSuper pension of $1783.03 gross per fortnight. This puts me $137.42 over the limit for a part pension. If I were to make a tax deductible gift of $200 would this qualify me for a part pension or is there some other way of reducing my income to qualify?

Unfortunately, the income test used by Centrelink relates to assessable income, not taxable income. Making a tax-deductible gift or donation would not reduce your income so that you would qualify. Depending on the type of pension being paid by ComSuper, there may be a deductible purchase price that would be allowed by Centrelink. You should contact Centrelink to see if this is the case.

Property valuations and SMSFs

We have purchased an unencumbered property in our SMSF with the member's account still in accumulation phase. Is it necessary to have the property valued, and if so, how often? In particular, once the member's account is in pension phase, how often would such a valuation be required, and would an appraisal from a real estate agent suffice? If not, it would mean a full property valuation could become a very expensive exercise on an annual basis, if this was the case.

For investments such as property, it is generally accepted that they need to be revalued every three years (unlike listed investments that are valued regularly). However, when a pension is started in an SMSF, the property value used must be not less than 12 months old prior to when the pension started. There is no requirement that the valuation must be done by a registered valuer. What is more important is the methodology applied to the valuation.

This means a real estate agent could value the property as long as they can provide details of the methodology used. Trustees of the SMSF could also do the valuation, as long as they used appropriate data and sources to back up the value placed on the property.

Offshore income tax

I have been asked by my employer to relocate to Singapore. They will be providing some relocation assistance and I have negotiated that situation to a satisfactory outcome. If my employer were able to maintain my salary payments in AUD as per current arrangements, would I be responsible for Australian or Singaporean income tax?

You will need to seek advice from a Singapore tax expert to assess whether your salary will be taxable in Singapore. My suspicion is, as you will be performing your duties in Singapore, you will be subject to Singapore income tax.

As you are an Australian resident for income tax purposes, your worldwide income is taxable in Australia. If you pay tax in Singapore, you will receive a credit against the income tax payable in Australia. Depending on the amount of tax paid in Singapore, you may still have extra Australian tax to pay.

Tax-free pensions

My mother-in law is a resident of Australia and has lived here since 1997. She arrived at the age of 59 as a retired nurse from Ireland and has her superannuation transferred across each month; a widow’s pension is also transferred. She has submitted an annual tax return each year and has always received a tax bill to pay. She is now aged 74 and is still submitting annual tax returns and paying tax. Can you tell me why her pension is not tax-free? Surely at the age of 74 – earning under the single-state Australian pension – she is entitled to a tax-free pension?

If your mother-in-law was receiving a pension from a taxed Australian superannuation fund, the pension would be tax-free. The problem is that she is receiving overseas superannuation and widow’s pensions, which are treated as overseas income and are fully taxable in Australia. If the pension was taxed in Ireland, she would receive a credit against any tax payable here.

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