PORTFOLIO POINT: Overseas property on a local tax return, CGT, buying a property from an SMSF, overseas share profits and when an SMSF member dies.
Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. It’s that experience working with private investors that has led to the Ask Max column, to provide expert advice to Eureka Report subscribers. – James Kirby, managing editor
- Overseas property, Australian tax return.
- Do I pay CGT on my share?
- We want to buy a commercial property from our SMSF.
- Are overseas share profits taxed?
- When an SMSF member dies.
I have a property overseas that is neutrally geared. When I came to Australia about 10 years ago, a friend who was an accountant did my first-ever tax return in Australia. He recommended I not declare this property in my tax return because it wasn't generating income anyway. I have maintained this position ever since, however I realise this is wrong and I want to correct my errors.
Typically, what are the ramifications and what penalties can/will the tax office impose if I retrospectively declare this overseas asset, and how far back can they go? The last year I did the tax return in my country of origin was 2005 and have since been declared a non-citizen there for tax purposes.
The tax office has two different penalties it can impose relating to tax returns. The first is a late lodgement penalty for not lodging a tax return by the due date. The second is an interest penalty, when an amendment is made to a tax return that results in income tax payable. The second penalty is calculated on an annual interest basis backdated to the time the tax should have originally been paid.
As no income was being generated from your property, there should be no tax or penalties payable. There is, however, a question on an individual's tax return relating to foreign source income. This question asks if the taxpayer has any assets overseas and in your case, “yes” should have been ticked. As there was no tax liability for prior years, you should make sure that the correct box is ticked on future income tax returns.
When you sell the property, depending on when it was originally purchased, there could be capital gains tax payable on any profit you make. To ensure your CGT is reduced as much as possible, you should be keeping track of all holding costs of the property. These include repairs, rates and taxes, interest on loans to purchase the property, and travel costs related to inspecting and managing the property.
CGT on my share
My wife and I bought an investment property in 1983 for $76,000. I got into financial difficulties in 1990 and sold my half-share to my brother for $70,000. On November 30, 1994, I bought it back for the same amount. The original contract was as joint tenants, whereas now it is tenants in common. If we want to get back to joint tenancy will this incur stamp duty and any CGT? I feel it would be better to make the transition, as it would be easier for my wife in the event of my death. Would my wife's share be CGT exempt? We moved into the investment home as our permanent residence in 2006 when the long-term tenant vacated it.
I don't believe there should be any stamp duty payable if you change the ownership back to joint tenancy. As the stamp duty regulations vary greatly between the states, you should have the stamp duty status checked by the lawyer who prepares the documentation to change the ownership type of the property. There will be no capital gains tax payable on this change in ownership type.
When the property is eventually sold, no tax would be payable on your wife's half-share because it was bought before capital gains tax was introduced. But because you bought your half-share back after 1985, a portion will be taxable, but as you have now moved into the investment property and use it as your residence, a portion of any capital gain will exempt from CGT.
My wife and I would like to buy a commercial property from our super fund. Our family company, of which we are directors, is the trustee. I understand that there will be no capital gains tax as our fund is active. However, will stamp duty be payable?
Whether stamp duty will be payable on the transfer of the property from your SMSF to you personally will depend on what state you are in. From my experience, if the property is in New South Wales, stamp duty will be payable. If it is in Queensland or Victoria, there is a possibility that no stamp duty will be payable. You will, however, need to seek advice from a lawyer that specialises in this area to see if stamp duty can be avoided.
Overseas share earnings
It would seem diversification of assets within a portfolio is a wise strategy and should possibly include investment in overseas shares. I am a retiree, aged 67, with SMSF funds in an allocated pension, which has attractive tax advantages. What taxes would the profits from such an investment be exposed to if I was to invest in global shares via say the London or New York stockmarkets?
As your superannuation fund is in pension phase, any profits made on overseas investments, as is the case with all of the income of the fund, will not be taxable in Australia. If your fund had been in accumulation phase, tax would have been paid at 15% on income generated by the overseas investments and at 10% on any capital gain made.
When a member dies
Can you please advise what the tax position is for undrawn pensions on death of a final member? For example, if the member dies halfway through the year with no pension having been drawn, does this amount go to the member’s estate or does it now form part of the member’s benefit taxable at 16.5%?
If a member dies halfway through a year and has not taken the minimum amount of pension required to be paid, that member's account will not be regarded as being in pension phase. This will mean tax is payable at 15% on all income earned.
When the superannuation assets are sold to pay out the benefits, any capital gains made would also be taxable. The member’s taxable benefit payable to the estate, which is then paid to non-dependent beneficiaries, will have tax paid at 16.5%.
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