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 members.
- What happens to non-company SMSFs when a trustee dies?
- Buying a rural property through a SMSF.
- Notifying the ATO after investment changes.
- When is an investment property subject to CGT?
- Can you have individual and corporate trustees?
- Dividend stripping rules explained.
The rules on dividend stripping
What is the 45-day anti dividend stripping rule? I have read on some websites that you need to own the shares for 45 days before or after the ex-dividend date and the 45 days cannot span the ex-dividend date. If, for example, you only owned the shares for 30 days before the ex-dividend date then you would have to hold them for a further 45 days after the ex-dividend date to be able to claim the tax credit?
To be eligible to receive the benefit of a franking credit a shareholder must own the shares for more than 45 days. For shares owned by individuals, this rule does not apply if the total of the imputation credits is less than $5,000. The period relating to ex-dividend does not count, but the total period of ownership is the test period.
When a SMSF trustee dies
My husband and I have our own SMSF with both of us as trustees, and have no children. The SMSF is not structured as a company. Please can you explain the problem if one of us died? Since the SMSF is very small we were advised to use this structure. What are the pitfalls of this in our case as we have no-one to add on as a trustee?
We have been diligently contributing to our super through salary sacrifice. Since both of us are over 50 years, is the limit of $50,000 still applicable after the budget or has it changed?
When one of you dies you will either be forced to convert the fund to a small APRA fund, which involves having a trustee company take over the trustee duties and can be expensive, or closing your fund and either rolling over into another fund or paying out your entitlements. These consequences could be avoided by forming a company that would take over as trustee from you and your husband. When one of you died the fund could continue. From July 1, 2012 the maximum contribution limit will be $25,000 until July 1, 2014.
Buying a rural commercial property
I would like to buy a rural property as an investment for my SMSF. There are few properties that are land only. Can my SMSF buy a property with a house on it as long as I and my relatives don’t live in it? Can my SMSF rent the land back to me as a farmer at commercial rates as you would with other business real property? Providing the SMSF does not gear the purchase, can the fund pay for new fencing, shedding etc?
If the property can be classed as a commercial property, in other words there is sufficient area and quality of land where a reasonable income can be produced and it would not be classed as a hobby farm, your super fund should be able to buy it even if it has a house on it.
An SMSF is banned from purchasing residential property from members but can purchase it from non-associated parties. When it comes to farming land the ATO has stated that a residence on a property will not affect it being classed as business real property if:
- the area containing the dwelling and used primarily for domestic or private purposes does not exceed two hectares; and
- the domestic or private use is not the predominant use of the property.
The super fund could make the property improvements you have mentioned. It may, however, be more tax effective if you as the tenant paid for the improvements. You should seek advice from an accountant that has experience in farming businesses to make sure you are maximising your tax benefits.
Notifying the ATO of investment changes
I am a trustee of an SMSF with two members with funds of approximately $1 million. The mix of our asset classes is one-third in real estate with a good rental yield; one-third in bank term deposit and bank accounts; and one-third invested in shares and hybrids. Our age is 63 and 57 and we are both collecting a TTR Pension.
During a conversation with my accountant I was surprised to hear his suggestion (he was actually telling me that I should do it in order to comply with the ATO requirements) to prepare a minutes of the trustees every time we decide to buy or sell shares, hybrids, warrants or any other investment. I believe that it is not necessary as our investment strategy should be sufficient. Your view would be very much appreciated.
You are right to query what you accountant is telling you. Primarily what trustees of an SMSF must do is dictated by the trust deed of the SMSF and the relevant sections of the SIS legislation. Although the ATO is responsible for regulating SMSFs, apart from income tax matters, the regulations are not formulated by it.
There are many examples of where the ATO interprets the relevant super regulations and issues rulings that in fact are not backed by the relevant legislation. An example is the ATO ruling requiring all trustees’ names to be shown on ownership documents for investments.
With regard to a trustee’s minutes being required for every investment made by an SMSF, I am not aware of an ATO ruling that requires this. Even if there was, unless the trust deed stated that this was required, there is no legal requirement for this to happen. I agree with you that as long as investments are made in accordance with the fund’s investment strategy nothing further is required.
Capital Gains Tax rules on property
My partner bought an apartment in October 2008, however it did not become her residence until February 2009 when the tenants moved out. She then moved out in February 2011 and rented out the apartment. When she sells that apartment, will she be exempted from CGT in full or partially? How is CGT calculated? Is it based on income tax bracket?
Your partner will only pay capital gains tax on the increase in the value of the property from the time it ceased being her home up until she sells it. Any gain she makes is reduced by the general 50% discount. The remaining 50% of the gain is then added to the rest of her taxable income and taxed at the applicable marginal tax rate.
Corporate and individual trustees
We are of the understanding that a SMSF either has to have individual trustees, or else a corporate trustee. Would there be any benefit or otherwise in having both individual trustees, as well as a corporate trustee? Assuming only a corporate trustee is required, would you please advise the process involved in changing from individual trustees to a corporate trustee? We have checked our trust deed and it allows for a corporate trustee.
You cannot have individual trustees and a corporate trustee, you only need to have the corporate trustee replace you. You will first need to have the company set up and then documentation must be prepared giving effect to the change in trustee. The trust deed of your fund should detail what documentation needs to be drawn up.
Once the company has been appointed to act as trustee you need to change the name the investments of the fund are held in to that of the trustee company. Your accountant should be able to help you with this process.
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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