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.
- Click on today's Inside Line video above to hear James Kirby interview Max on having property inside your SMSF.
- What are the tax and super rules for non-residents?
- If I rent out part of my home, do I pay capital gains tax?
- How do I minimise my tax liability as a retiree?
- What are the tax benefits of dividend reinvestment schemes?
- Can my fund manager force me to use its stockbroker?
What are the tax and super rules for non-residents?
I’m a 54-year-old Australian citizen who left the country in 2000, so I’m a non-resident for tax purposes. I have two apartments in Sydney, the rental income is around $30,000, and the interest income is subject to non-resident withholding tax. I have no other assessable income in Australia. My plan is to minimise my tax payable as a non-resident. I have a series of questions:
- Can I claim a tax deduction on the personal super contribution? Does the eligibility to make those contributions in Australia apply equally to residents and non-residents?
- If my foreign employment income is not included in Australia as assessable income, will I satisfy the 10% rule?
- Does the co-contribution apply to non-residents?
- Can I set up an account-based pension in my super once I reach to 55, even when I am still working overseas? Is it a benefit for me to set up this pension account?
- Is a non- resident subject to the same conditions of release as a resident?
The answers to your various questions are as follows:
- On the Tax Office website there is no requirement for someone to be a resident to claim a tax deduction for a self-employed super contribution. As you are not eligible to receive employer super support you would be eligible to claim a tax deduction for a self-employed super contribution.
- Yes, you will.
- As you will not be earning employment income in Australia you will not be eligible for the co-contribution.
- Unless you have met a condition of release you will not be able to set up an account-based pension but you could start a transition to retirement pension when you turned 55. The benefit of starting a transition to retirement pension with your Australian super fund would be that no income tax is payable by the fund on income it earned.
- The conditions of release are the same for residents and non-residents except that a person leaving Australia permanently is able to access their superannuation as a lump sum. In this situation tax is paid at 35% on the taxed super received.
If I rent out part of my home, do I pay capital gains tax?
Is it true that if you rent out a room of your home or a granny flat on the same property title as your home that the home is then subject to CGT?
If you rent a room in your home, or rent a granny flat on the property that is your principal place of residence, a portion of the property will become assessable for capital gains tax purposes. This is a complicated area of tax law and you should seek professional advice about what your options are to minimise the CGT impact.
How do I minimise my tax liability as a retiree?
I am 57, retired and running my own SMSF with my wife who is aged over 60 and also retired. We both draw minimum pensions, are not working and have no current requirement for extra income. I have about $300,000 outside super which I was planning to contribute later this year. Since I retired, I have drawn $50,000 as a lump sum and about $40,000 in pensions.
Next financial year, after contributing the extra cash into super and with the minimum pension payment returning to 4%, I am getting very close to the point where the superannuation income stream tax offset is not covering my income tax liability. I was wondering whether there was any way that I could use my remaining lump sum “low rate cap amount” to minimise my income tax liability?
As you have already withdrawn $50,000 as a lump sum, based on the maximum lump sum limit for the 2013 tax year that can be withdrawn from super for someone who is under 60, you could withdraw a further $125,000. This would need to be done by commuting your current pension, taking the lump sum, and then recommencing the pension.
Once the pension had been recommenced you could then make a non-concessional contribution of $420,000. You would then start a new account-based pension from this sum and, as this pension will be made up totally of tax-free super benefits, no tax will be payable on the account-based pension paid.
If you would still be paying tax on the original pension you could consider commuting some of it back to accumulation phase so that the pension rebate would offset any tax payable. This is a complicated area of superannuation law and you should seek professional advice before taking any action.
What are the tax benefits of dividend reinvestment schemes?
I have some shares in one of the banks with fully franked dividends. Can you please advise on the benefits of the dividend reinvestment plan verses receiving the dividend with franked credit? My understanding is participating in the reinvestment plan will lose the benefit of franking credits. Also please explain if you are in a dividend reinvestment plan for three years, how do I calculate the capital gain when the shares are sold in the fourth year?
When you participate in a dividend reinvestment plan you do not lose the benefit of the franking credits. The franked dividend you have forgone as extra shares still needs to be included in your taxable income. This means you will need to show on your tax return the cash value of the dividend forgone plus the franking credit attached to the dividend.
One of the benefits of signing up for dividend reinvestments is that the cash is used to increase your shareholding rather than being spent and not used for wealth creation purposes. When you sell the shares in the bank the cost used for capital gains tax purposes will include your original purchase price and the value of each cash dividend reinvested.
Can my fund manager force me to use its stockbroker?
We have had an SMSF for about 10 years. It is administered by a large well-known Canberra company specialising in SMSF administration. It prepares the annual accounts and the audit as well as providing financial advice if required, which is paid for separately. We have been happy with this service and the price charged.
We have always managed the investments of our fund ourselves, using a stockbroker and various bank deposits of our choice, in the spirit of a true SMSF. The Canberra company now seems to be ‘forcing’ all customers to use the company’s stockbroker and banks. It is doing this by charging an unconscionably high annual fee if the customer does not put all their shares, investments etc under the company’s control and receive financial advice. We believe this is not in the spirit of the SMSF rules but do not know if it is legal or not. Of course we can move to another SMSF admin company, but that is not the point of this enquiry. Hoping you can advise?
The old saying, “there is no such thing as a free lunch”, applies in this situation. I am sure your current admin company has checked that it can legally do what it is doing. Your only two options will be to stay with the current company, and pay the high fees, or move to an administration company or an accountant that specialises in providing these services to SMSF trustees.
Due to the level of compliance duties forced on accountants and administration companies, and because of the cost of auditing an SMSF, a reasonable fee for providing an administration service to the trustees of an SMSF should range between $1,500 to $3,000. This fee will be higher if there are many different types of investments, regular buying and selling of investments, and where a pension is paid by the super fund.
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 firstname.lastname@example.org