Ask Max: Your questions answered

Government tax changes, TTRs, property capital gains and more.

Summary: This article provides answers on the government’s planned superannuation tax changes, when to start a TTR, capital gains tax on a second home, and starting an SMSF for a better return.

Key take-out: Even if a person has two residences, they can only ever have one main residence and receive the CGT exemption for this.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Clarifying the government’s tax changes to super

In relation to the government’s intended changes to superannuation, we are wondering whether the planned tax increase will be applied to super contributions, to withdrawals from the pension fund, or to earnings of investments within the superannuation fund. We would appreciate your advice on this.

Answer: The policy changes announced by the Gillard Government in April primarily concentrated on taxing income earned by superannuation funds paying a pension that earned more than $100,000 a year in income. At the present this is only a policy, and more than likely will not become legislation unless the Labor Party is re-elected in September.

When is the best time to start a TTR?

Is there any advantage to starting a transition to retirement account before June 30, 2013? I am 57 and my husband will be 60 by October 2013. We have separate super accounts and are both in full-time employment. We have a total of $200,000 in each person’s super accounts. I am in Macquarie and Hostplus, my husband is in One Path and Australian Super. I have no intention of running an SMSF. When is the best time for my husband and I start a TTR account?

Answer: The first thing you should look at doing is consolidating your superannuation into one super fund. It does not make sense having four superannuation funds between the two of you. I know Australian Super on their website offers a superannuation fund comparison tool. By entering the four different funds you have you could work out which fund will be best for you from a cost and investment point of view.

As your husband will be 60 in October, it would make a great deal of sense for him to start a TTR pension at the minimum pension rate. The pension he receives would be tax-free and the income earned by his pension superannuation fund account would also not have tax paid on it. As a result of the tax-free pension income being received he should then be able to, when taking into account his employer SGC contributions and salary sacrifice contributions, make contributions up to his maximum limit.

As to when it will be best to start a TTR pension will depend on a number of factors. Before making any decisions as to whether to start a TTR pension you should seek professional advice from a fee for service advisor, preferably one that is not tied to any financial institution or bank.

Is capital gains tax payable on a second home?

In October 2005 I bought an investment property in Brisbane jointly with my former wife. Following our separation we finalised a financial settlement in December 2009. I took out a loan and bought out my wife’s 50% share in the investment property. My wife’s 50% share of the property was transferred to me through the court order. I have been a 100% owner of this property since and still use it as an investment.

I now live at the Gold Coast and have an owner-occupied home here, however I work in Brisbane and commute daily between the Gold Cost and Brisbane. To avoid daily commuting I am thinking of using my Brisbane property as the second home but don't understand CGT implications if I stop using it as an investment property. Would I be liable for CGT, and if so is it payable in the financial year in which I stopped the investment or in the financial year when the property is sold?

Answer: A person can only ever have one main residence and receive the CGT exemption for this. As the property has always been used as a rental property using it as a place to stay when you are in Brisbane does not change how it is treated for capital gains tax purposes. Capital gains tax would be payable by you when the property is sold, not when you start using it for private purposes.

The amount of the capital gain payable by you when the property is sold is calculated by subtracting the cost of the property from its net selling value after all costs, including agents fees. The cost of the property will include its original purchase price, settlement costs such as government charges and legal fees, and all costs of the property for which you did not receive a tax deduction. This will include any improvements you make to the property once you start using it.

As you have owned the property as an individual, and have owned it for longer than 12 months, you will only pay capital gains tax on half of the capital gain you make. The tax that you pay on this gain will depend on the other income you earn in the year you sell it. If you chose to sell the property after you have retired, but are receiving a tax-free superannuation pension income, the amount of tax payable by you would probably be reduced greatly.

Should I start an SMSF for a better return?

I am 60 and my wife is 53, we are both working full-time at the moment, but I am winding down. I have a transition to retirement annuity pension with Sunsuper and the cash component is now over $100,000, but the majority is in growth assets in index funds. The cash rate is only 0.09%. Is it worth starting a basic SMSF for a better return on the cash and replicating the asset mix with ETFs?

Answer: There are many considerations that you should take into account about whether you should be setting up an SMSF or continuing with Sunsuper. Because this is an industry fund its administration fees can be lower than the fees would be if you had an SMSF. The fees you are paying to Sunsuper will depend on the balance of your account with them.

Sunsuper charges fees on pension accounts in components. The first is $4 a week as a flat fee, and the second is 0.10% on your account balance up to $800,000. This means the maximum fee you would be paying to Sunsuper for your TRAP would be $1,008. The cost of preparing annual accounts, tax returns, and conducting the audit for an SMSF will in most cases be more than this $1,008.

Cost should not be the only reason you would be thinking about setting up an SMSF. Having greater control of how your superannuation is invested is often one of the main reasons for having an SMSF. This flexibility related to investments does, however, come at the increased responsibility the trustees of an SMSF have.

In addition to the annual cost there would also be the set-up cost of the SMSF. Due to the flexibility of having a company act as trustee the cost of setting up an SMSF would be approximately $1,600. On this basis, if the only reason you are setting up an SMSF is to get a slightly better return on cash, this would be eaten up in no time by the increased administration costs and also the set-up cost.

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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