|Summary: This article provides answers to whether capital gains tax is payable on inherited investment property, in-specie transfers and CGT, transferring life insurance to a SMSF, whether managing a rental property satisfies the work test, and if an in-specie transfer date can be chosen to minimise tax.|
|Key take-out: In-specie transfers of assets into SMSFs are complex, and can trigger capital gains. The Tax Office is also scrutinising funds that manipulate transfer dates to reduce tax.|
|Key beneficiaries: SMSF trustees. Category: Portfolio management.|
Is capital gains tax payable on an inherited investment property?
My father bought a house in 1972 and passed away in 2003, leaving the property to myself and my brother. My kids moved into this property and live there rent-free. Three years later I bought my brother out, with my kids still living in the property rent free. The whole time I have lived in my own house with my wife, and only ever lived in the inherited property growing up as a teenager. If I were to sell this property, would there be any capital gains tax? If so, can this be minimised?
There will be capital gains tax payable by you when you sell the property. The calculation of how much capital gain has been made will be complicated due to your ownership of the property being made up of two different parts.
The first part will be what you inherited from your father in 2003. As the property was a pre-capital gains tax property, your purchase cost will be half of its market value at the date of your father’s death. Your capital gain on this half of the property will be the difference between half of the net sale proceeds at half of the value of the property when your father died.
The second part that you purchase from your brother will have a purchase cost of what you paid to your brother. The capital gain on this half will be the difference between half of the net proceeds and this cost.
As the property will be known by you for more than 12 months, the amount to be included on your assessable income will be half of the combined gain you make. The only way to reduce the tax payable on this capital gain is to reduce your taxable income from other sources. There are a number of strategies that are available and you should seek professional advice on whether any of these would be applicable to you.
Would an in-specie transfer of assets from a pension to a SMSF trigger CGT?
I am 62 years old, work permanent part-time (33 hours per week) and draw the minimum allowable from my allocated pension, which is in a wrap account at Colonial First State (CFS). I now wish to establish a SMSF with myself as both the sole member and sole director of the corporate trustee.
The underlying investments within the pension account consists of Australian shares, managed funds, term deposits and, of course, cash. I would like to transfer/rollover the existing assets to the soon-to-be-established SMSF, which would commence in the accumulation phase and then convert to a transition to retirement pension.
CFS has indicated that my request is highly unusual and that they probably will not accommodate my request. The matter has now been referred to higher management within CFS. As I would remain the sole beneficial owner of the assets and those assets remain within the superannuation regime, I cannot understand why it would be such a problem.
Would a transfer/rollover of assets in-specie from my existing pension to a SMSF trigger a CGT event or would I have to sell down all of my holdings, cease the pension, roll over the proceeds to the SMSF and reinvest again? Mind you, I would be severely disadvantaged in some respects as my returns would diminish in the case of some stocks.
Under the CFS super wrap account a trustee company would be shown as the owner of the investments. Although you would be shown as having those investments in your members account you are not actually shown as being the legal owner of those investments. As a result the investments cannot be rolled over in-specie into your SMSF.
Another reason why CFS would not agree to transfer the investments, even if they could, is the paperwork and administration required to transfer investments in-specie is substantial. Your only choice, if you want to maintain the same investments in your SMSF, is to use the cash proceeds rolled into it from CFS to purchase them in your SMSF.
If you had been able to make an in-specie rollover of the investments this would have resulted in a capital gains tax event and, because this would have had to been done while the fund was in accumulation mode, capital gains tax would have been payable by your CFS fund. It makes a lot more sense to sell the investments while your CFS fund is in pension phase and then roll over the cash. In this situation no capital gains tax will be payable.
I do not understand how the return on these investments, if you buy them back within your SMSF, will be diminished. The actual return on these investments should be calculated on their market value, not on what they originally cost. This will mean your investment return will stay the same.
Can life insurance be transferred to a SMSF?
I have a term life insurance plan, and the insurance cover is for death and disablement lump sum advanced cover. I have had this plan for many years and pay a yearly premium. My wife and I have just set up our own self-managed super fund. Can I transfer this insurance plan into our SMSF?
For a life insurance policy to be paid by a SMSF, the policy must be owned by the fund. I know of some cases where insurance companies have allowed the ownership of a life policy to be transferred from the name of the individual into a super fund where the life insured remains the same. You will need to contact the insurance company your current policy is with and see if the ownership can be changed to that of your SMSF.
Does managing a rental property satisfy the work test?
I am 68 and drawing a pension from my SMSF. I also have a mortgage-free residential unit providing a net income of approximately $42,500 per annum. I have been informed that I cannot deposit my rental income into my SMSF. This is because it is passive income and therefore cannot be accounted for me to meet the work test to make super contributions. Is this correct, as I pay income tax on the rental income?
To be able to meet the work test you must be able to prove that you have worked for 40 hours in a consecutive 30-day period in the financial year you make a super contribution. Even if you did work 40 hours a month on your rental property, as you only have one rental property and this is regarded as a passive investment, you would not be regarded to have passed the work test.
The only time a person can pass the work test when they have rental properties is when they have a sufficient number of rental properties to be regarded as running a rental property business.
Can any date be nominated for an in-specie shares transfer to give the best tax advantage?
We are in the process of transferring shares held outside of superannuation to our SMSF, and our sponsor is CommSec. One of the questions in the application is the date of purchase, which is the transfer date of the shares to the SMSF. We have been told by CommSec that we can nominate any date that gives us the best tax advantage. Is this correct?
Strictly speaking the date of transfer of the shares, in other words the date of purchase of the shares by your SMSF, should be the date it was decided to transfer the shares. It is this manipulation of the transfer date to obtain a tax advantage, by selecting a date when the patch result will be achieved, that caused the recommendation from the Cooper review to ban in-specie transfers of shares.
ASIC bans a person from buying and selling their own shares in one transaction. This means you can still do it as in-specie transfer, but you should be careful when selecting the date for the transfer. If the ATO were to audit your fund, and found that the date had been manipulated to achieve a better tax result, you could be forced to provide other evidence to back.
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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