|Summary: This article provides answers on the minimum share parcel size, non-resident purchases of property, stamp duty on SMSF property transfers, the Low Income Health Care Card, testamentary trusts, and more.|
Key take-out: Where an SMSF is not borrowing to purchase a property there is no need to buy it through a bare trust.
Key beneficiaries: SMSF trustees. Category: Portfolio management.
What is a minimum share parcel size?
I’ve noticed recently that a number of commentators discourage investors from buying ‘small parcels of shares’ without actually defining what they mean by this. My wife and I have an SMSF and I’m interested in what is regarded as a small parcel. Is it $5,000, $25,000 or $50,000? Surely a $100,000 investment wouldn’t be considered a small parcel, or does it depend on the value of your portfolio and therefore other factors need to be taken into account?
The reason why investors are discouraged from purchasing small parcels of shares is because of the brokerage fees. This is because when a small parcel of shares is purchased the brokerage fees have to be added to the cost, and in this case the cost will be a greater percentage than if a larger parcel was purchased.
For example if the brokerage fees are $100, and a parcel of $1,000 of shares is purchased, the share price must go up by 10% before the investor makes a profit. If $5,000 in shares were purchased, and the brokerage remained the same, the shares only need go up by 2%. This $5,000 parcel of shares is what was once regarded as a reasonable minimum purchase value.
Since the introduction of the low-cost internet-based share services the brokerage costs have reduced greatly. A small parcel of shares could now be as little as $1,000, as long as the brokerage fees are under $30.
Non-resident purchases of Australian property.
I am an Australian citizen and have been living overseas since 1999 (therefore I am non-resident for tax purposes). I am married to a Maltese citizen with no Australian permanent residence visa. We saw your Eureka Report dated 22 June 2012 which answered some questions from another non-resident Australian citizen with regards to property investment and taxation status. The queries that we currently have are:
- How would purchasing a property in Australia affect our taxation status?
- Is it worth buying a future home that we think we would like to live in (perhaps within the next 10 years) or to purchase an investment property that we would only rent out, or is it better to continue with our overseas investments that are not related to property
Buying a property in Australia will not change your residency status for tax purposes. If your plan is to eventually settle back in Australia it can make a lot of sense to buy a property now. It will be better if you buy a property in an area you want to live in. By doing this you will have bought into the property market at today’s values and you will be protected if the area you want to live in increases greatly over the next 10 years.
Stamp duty on commercial property transfers to a SMSF.
I have a commercial property which is valued at $780,000 and has been owned by my family trust for 23 years. My wife and I are the trustees of the family trust and are also the trustees of our SMSF. The property is debt free. Can you tell me if stamp duty would be payable on the transfer if we sold the property to our SMSF? I understand capital gains tax would apply.
Your liability to pay stamp duty on the transfer of the property will depend on the state where it is located. From personal experience I know that if certain criteria are met no stamp duty is payable on these types of transactions in Victoria and Queensland. To assess whether your transaction will be subject to stamp duty you should contact a lawyer that specialises in this field in the state where the property is located.
Income levels for the Low Income Health Care Card.
I am 61 and recently sold a taxi plate which was leased out. The proceeds from this were combined with an existing income stream, which now totals $476,021. From this I draw $28,500 P/A. As I am not yet of pension age, if I were to apply for a Low Income Health Care Card, would the income test include the full $28,500 income stream, or could I divide the initial pension account by my life expectancy 21.79, and thus only have to declare $6,654?
I also am still self employed driving a taxi once or twice a week, and have a rental property. Would income declared from these sources be net of costs?
The different types of income counted for the Low Income Health Care Card are the same as for the old age pension. In simple terms it will be your taxable income with some items adjusting this. Where taxable income includes a rental property loss this is added back. This means your costs related to driving the taxi and the property costs, as long as they don’t result in a loss, are included.
Another item added to your taxable income will be the superannuation pension income you receive, after allowing for its purchase price. The purchase price of the pension is calculated as you have shown. This means the $6,654 would be counted and not the $28,500.
Does property in a SMSF need to be bought through a bare trust?
I wish to buy an investment property outright using my SMSF funds, i.e. without going into debt. It is my understanding that I won’t need to set up a bare trust to hold that property within the SMSF structure. Could you please confirm whether this is correct as I have received some conflicting advice – an SMSF expert at an investment expo said that I have to still set up a bare trust to hold the investment property?
You are right and the so called SMSF expert was wrong. Where an SMSF is not borrowing to purchase a property there is no need to buy it through a bare trust.
Should I set up a testamentary trust?
I have been advised that it would be worth arranging for the establishment of testamentary trusts via my mother’s will for myself and my children. I would appreciate your advice on when these are useful vehicles.
A testamentary trust has many uses. One of them is when the beneficiaries of the deceased are under 18. This is because children that receive investment income usually pay tax at the top marginal tax rate. One of the exceptions to this is when the income is distributed from a testamentary trust. There can be some disadvantages of using a testamentary trust. You should therefore seek advice from a lawyer that specialises in estate planning.
Will the tax percentages in our SMSF remain constant?
When our corporate SMSF was commenced, I was over 60 on a transition to retirement pension and put in approximately 4/5ths of the equity, and my wife, who was under 55 and not on a TTR, contributed the balance. For taxation purposes does that equation always remain the same or does it change?
The value of a member’s superannuation account is increased by contributions and income, and decreased by expenses, tax and benefits paid out. This means if you stay in pension phase and your wife continues to make contributions her super balance could end up being a greater percentage than yours.
The only superannuation benefits that remain the same are the percentage of taxable and tax-free benefits when a pension is started. This means if your TTR pension was made up of 80% taxable benefits and 20% of tax-free benefits when it commenced these would remain unchanged for as long as the pension is paid.
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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