Ask Max: Your questions answered
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.
This week:
- When is capital gains tax payable on a deceased estate?
- Recontributing a lump sum to super.
- SMSF property ventures with related parties.
- Are adult children dependents for death benefits?
- Is CGT payable on in-specie share transfers?
- Placing super fund money in bank term deposits.
- Making a capital loss from an unlisted property trust
When is capital gains tax payable on a deceased estate?
My father passed away in April and left his home property to his five children, in equal shares. The property was his permanent home, never an investment property. A younger brother wishes to remain living in the house for up to another three years, pending the building of another house.
That allowance is not mentioned in the will, although my father had said he could reside there for as long as he likes. My brother is having a solicitor draw up a document to that effect for the other four siblings to sign. Would capital gains tax come in to play over that three year period and how is it determined?
An executor has two years after the date of death of the deceased to either sell or transfer their former home with no capital gains tax being payable. If the property is sold after the two years CGT would be payable on the increase in the value of the property.
An application can be made to the Commissioner of taxation to extend this period, but given the circumstances of your case I cannot see that this discretion would be exercised. It will be a lot simpler for you and your three siblings if the property is sold within the two-year period. The tax-free status of the property does not change if your brother pays rent and, in the interest of fairness and equity, he should at least be paying all of the holding costs of the property for the two years.
Recontributing a lump sum to super.
Now that I am over 60 and permanently retired, I want to make a lump sum payment from my SMSF and re-contribute it back tax free. Can I make that payment regardless of whether the fund is in accumulation mode, pension mode, or both?
A lump sum payment can be made from the fund from both accumulation and pension phase. If it was made as a pension payment, extra documentation would need to be prepared. If made in accumulation phase, the pension would need to be commuted. Before embarking on the strategy you should seek professional advice.
SMSF property ventures with related parties.
I am proposing to make a direct property investment with my SMSF. The proposal is to go into a house and land package in partnership with my son. He would borrow most of his half, and my SMSF (which is in pension mode) would use all or mostly cash. On completion of building it is proposed the house will be occupied by my son and he will pay the proportional going rental to the SMSF. Our intention is to have an agreement for sale of the property at a predetermined time, but otherwise to suit either party. What are your comments on any particular requirements or concerns with this proposal as a SMSF investment?
Unless your son has other property that can be used as security for the loan your SMSF cannot own property that has a mortgage over it. In addition, your SMSF could not buy the property because of your plan to have your son occupy it. He is a related party of yours and he could not therefore occupy the property.
Are adult children dependents for death benefits?
Looking at my super deed, a death benefit can be paid to a dependent. However the definition of dependent means “the spouse, widow, widower and children of a member, and all persons who are in the opinion of the trustee in its absolute discretion at the relevant time dependent in whole or in part upon the member for their maintenance and support”.
Assuming binding nominations have been made for the super to go to my children and grandchildren, are my adult children dependents when they no longer receive financial support? Can the trustee pay a death benefit to grandchildren where they have not been in receipt of financial support?
From what you describe your children and grandchildren are not dependents of yours. This does not stop the trustee paying death benefits to them, but it will mean that the taxable portion of your superannuation they receive will have tax paid at 16.5%.
Is CGT payable on in-specie share transfers?
My husband and I are both over 50 and are contributing the maximum amount of concessional (pre-tax money) allowable into our SMSF. This year it will be $25,000 per person. The SMSF is not currently in pension phase. Could we make a non-concessional in-specie transfer of a portfolio of shares worth about $130,000 into the fund on top of the pre-tax amount?
These shares have enjoyed a large capital gain. Am I correct in thinking that transferring them into the SMSF would avoid the payment of a large capital gains tax providing we left them sitting in the SMSF until the fund was in pension phase?
You can make an in-specie transfer of your shares to the super fund, and capital gains tax will be payable on the profit you make. The shares would need to have a market value placed on them at the date of the transfer and, as long as the shares have been held for more than 12 months, capital gains tax would be payable on 50% of the excess of the market value over what the shares cost. Once the shares are in the super fund no tax would be payable by the fund if it is in pension phase at the time of the sale.
Placing super fund money in bank term deposits.
We are joint holders of a personal SMSF in pension phase. We wish to obtain the best rate for either an online call deposit, or term deposit. In many cases banks and financial institutions either will not take super fund money, or state that it has to be personal money.
Our main bank for the super fund is Westpac which is happy to take our SMSF money. However they can’t always compete with others on rates. Currently the best online savings rate is 5.75% with a financial institution that states that this must be for personal funds.
We were proposing to make a deposit from our Westpac super fund account. On the application form we would enter our two names as joint holders. Where the application form asks for a TFN we would enter in the TFN of our super fund, under each of our names. However we are not telling the financial institution that the money belongs to a super fund, or that we are trustees for that fund.
Given that we are not trying to cheat the ATO by disguising that the money is super fund money, and that we are aiming to get the best return for the super fund, is there anything wrong with this?
From a tax perspective there is nothing wrong with what you are planning to do. My main worry is that when the financial institution sees the same tax file number for both of you this will prompt a question and they will not accept the deposit. I know there are financial institutions that do accept deposits from SMSFs. Two that come to mind are ING and Ubank.
Making a capital loss from an unlisted property trust.
We acquired a share in an unlisted property trust that bought a parcel of land, which is currently developing it and selling off all the plots before eventually closing after all the land has been sold. The value of the share at acquisition was $200,000 (it was inherited) and is producing excellent returns in fully-franked dividends. When all the land is finally sold off the capital value of the share will be zero after the income has also been fully distributed. Will this mean that there will now be a capital event that produces a capital loss on the share of the trust?
I do not understand how the company can distribute all of its cash as fully-franked dividends and be left with nothing. This could only happen if the original purchase cost of the land and the improvements have been financed and not come from funds relating to the issued capital of the company.
The $200,000 purchase value would appear to be the market value of the shares at the time of inheritance. If the company is liquidated and no value is received on liquidation, theoretically a capital loss of the $200,000 would be made. You should seek advice from an accountant before returning the capital loss on your tax return.
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