|Summary: This article provides answers on selling farming land and GST, buying international shares and the tax implications, investment risk and financial advice, changing the status of transition to retirement pensions, and selling a property to improve superannuation.|
|Key take-out: The tax-free status of a transition to retirement pension is affected by your age and the components of your superannuation account.|
|Key beneficiaries: SMSF trustees. Category: Portfolio management.|
Selling farming land and GST
We currently run a farm machinery business in Victoria. We have decided to close the business and sell the land. Selling the business as a going concern is not an option as it is in the family name and we may decide to start a similar business in the future, therefore wanting to use our name. Should we close the business and then sell the land or continue to trade until the land is sold? The business pays rent to my father-in-law to supplement his pension. Will we have to pay GST after the sale because of this?
It would appear that you are running your business from land owned by your father-in-law, you pay rent to him, and you are registered for GST. If this is the case, and you do not own the land and only pay rent for the use of it, the timing of selling the land and the business are not linked. GST would only need to be included in the sale of the land if your father-in-law is registered for GST.
The decision as to whether to sell the land first or continue to trade until the land is sold will depend on what achieves the best investment result. There are several GST exemptions that can apply to farming land. Both you and your father-in-law should seek professional advice before any action is taken.
Buying international shares and the tax implications
I am a subscriber and wonder if you could possibly include an article on how to go about buying international shares and the implications/pitfalls for newbie Australian SMSFs who are not using brokers. Also, what are the offshore and onshore tax implications, currency conversions, fees picked off on the way?
There are two options if you want to buy shares in foreign listed companies. The first is to buy shares directly in foreign listed companies. Many online brokers offer access to overseas share markets.
The second is to invest in overseas companies using managed funds. These managed funds can be very general and invest on a global basis, others can be sector specific such as Asian and emerging share markets, and also there are funds that invest in an overseas share index.
Dividends earned from overseas shares will be income of your SMSF and tax will be payable at the 15% rate, unless your fund is in pension phase. Taxes can sometimes be paid in the country where the share is listed. A credit is received by your SMSF when this occurs. Where the shares are sold and a capital gain is made this will be taxable in your SMSF and tax paid at 10%, unless the fund is in pension phase.
Investment risk and financial advice
On the advice of a financial planner introduced to me by my accountant, who had a financial interest in the planning firm, I placed $1 million with the planner who kindly invested it all in a mixture of Australian shares and various funds both local and overseas before 30/06/2007. On, or just after 30/06/2007, I invested a further $450,000.
I have lost in excess of $450,000. No one told me at the time that the stockmarket was 1,000 points above its long-term average. When my accountant rang to enquire as to why I was leaving him to set up my own fund, I told him about my concerns over the financial planning advice I had been given. There was a silence on the phone. Can you explain to me about risk and what it really means?
There are several types of risk when it comes to investing. The risk that affected you the most was market risk. Where an investment is sold on an open market there is always the risk of major drops in value. There is also cash flow risk. In this case, when the cash flow produced by investments decrease and a level of income must be produced to meet expenses or to satisfy minimum pension payments, investments must be sold and the chance of losses increased.
One of the best ways of decreasing investment risk is through diversification. This means rather than having most of your superannuation invested in one class of investment, such as Australian shares, there should be a balanced spread across the different asset classes. These include Australian shares, international shares, fixed interest, property and cash. To decrease risk further there should be diversification within each investment class.
When it comes to property the financial advice industry for many years has incorrectly classed listed property trusts as a property investment. Rather than being a property investment, listed property trusts are really an investment in a subset of the All Ordinaries Index.
For me a property investment should only be direct property. This can be achieved by an SMSF investing in property itself or investing in unlisted managed funds that invest directly in property.
As a part of the investment selection process, trustees of an SMSF that is in pension phase should ensure that the income produced will be sufficient to meet the minimum pension requirements. In addition, a cash balance should be maintained to ensure pensions can be paid without the trustees being forced to sell investments.
Changing the status of transition to retirement pensions
I have just turned 60 and actively manage our family SMSF. I have been utilising the benefits of a transition to retirement pension (TRAP) since I was 55, opting for the minimum legislated pension amount each year. I make personal contributions each year and also have received a small amount of concessional contributions from a small business that I jointly manage and own.
I understand that my pension receipts after the age of 60 will be completely tax free but I am not sure whether I have to actually do anything to effect this change. Does my TRAP automatically change its status or am I required to somehow 'change' it?
The tax-free status of your TRAP is affected by your age and the components of your superannuation account. Once a person turns 60 the superannuation pension they receive is tax-free. The TRAP does not change, only the tax treatment of the pension received. Trustees of an SMSF paying a pension would need to advise a member of the value of the pension received prior to them turning 60, which would be taxable depending on its components, and the balance of the pension received after they turn 60, which would be untaxable.
A superannuation account is made up of taxable superannuation and tax free superannuation. Where a pension is paid made up of tax-free superannuation this component is not taxed. The taxable and tax-free components of a pension remain the same for as long as it is paid.
Selling a property to improve superannuation
I am a 58-year-old retired public servant receiving a CSS pension. In 1998 my wife and I purchased an investment property on the Gold Coast. Ownership, for tax reasons, is my wife has 1% and I have the balance. The property is valued at around $300,000 and is rented at $320 per week. The mortgage is $30,000 but we could pay this out if required. What options are available to me to use this asset to improve my superannuation?
There are very few options that you have other than to sell the property. If you used your increased equity in the investment property to borrow funds to make a super contribution the interest paid would not be tax-deductible.
A better strategy would be to consider selling the property after you have retired and before you turn 65. By doing this any capital gains tax payable could be reduced by making a tax-deductible self-employed super contribution. Before undertaking your strategy, or the one I propose, you should seek professional advice.
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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