Ask Max: Your questions answered

Moving from Dubai to Sydney: selling a property and starting a pension. Plus, super contribution changes and family trusts.

PORTFOLIO POINT: Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. Each week he draws upon this experience to answer the questions of Eureka Report subscribers.

This week:

  • We’re moving from Dubai back to Sydney, and plan to sell our house.
  • Super contribution limits.
  • If I move interstate, do I need to change my company registration?
  • Distributing trust income.
  • The tax implications of starting a pension.
  • Family trusts and asset transfers.

Non-residents and CGT

My wife and I are Australian non-residents, having lived in Dubai for nearly six years. During this time, we have let out our principal residence in Sydney. We hope to stay in Dubai for another three years, and then return when we will both be just over 60. We have an SMSF, which has been operational since 1992, and the fund is fully compliant, even though we are non-residents. What is the capital gains tax position with regards to selling our property if we return to Sydney and move to full-pension mode on our return?

I am surprised to hear that you are both non-residents, but your SMSF is still compliant. If the central management and control of a fund – the trustees of the fund – perform their duties and activities outside of Australia, their SMSF would be noncompliant. The ATO allows for the trustees of an SMSF to be absent from Australia for up to two years. As you have been non-resident for almost six years, this would normally have caused a problem when it comes to the compliance of your SMSF.

With regard to your property in Sydney, you will retain the principle place of residence CGT-exemption, as long as the home has not been rented out at any time while you've been overseas. If you have rented the property, it will still be exempt from CGT as long as it is sold before six years have expired since you left Australia. As you plan to be away for another three years, one of you should return to Australia and live in the home for a period of time before the six years have expired.

Super contribution changes

I am a tail-end baby boomer (we always seem to get fleeced of baby boomer entitlements), aged 51, who will be directly impacted by the government’s changes to the concessional superannuation contribution limits. I started contributing the maximum allowable contribution of $50,000 as soon as I was able (whoopee doo – this was only 15 months ago), and had hoped to continue this for some years to come.

My superannuation balance is currently around the low $400,000-mark, so I should have at least one more year of contributing at this rate. No one has yet stated at which part of the year the balance of $500,000 is going to be taken to determine what the contribution limit will be for that financial year. With this new limit supposedly being set for the next financial year (this is only just over three months away), how can any legislation setting the new limits be passed?

Unfortunately, if the new legislation is not passed, there will only be one contribution limit of $25,000 for everyone. You should consider splitting your superannuation with your spouse so that your superannuation will be below the $500,000 limit for as long as possible.

You have until the end of this financial year to allocate up to 85% of your super contributions made in the 2011 year to your spouse, as long as she is under 65 and not retired, and your super fund allows it.

Moving interstate

I currently live in WA and am about to move my SMSF from having three trustees (including myself) to a corporate structure, with me as the sole trustee. The other two trustees have asked to leave for personal reasons. This involves a lot of paperwork and the registration of the company in WA. I intend to retire to Queensland later this year. Will it matter that I have the company registered in WA when I live in Qld, or will it mean that I need to change the company registration to Queensland?

Companies are registered through the Australian Securities and Investments Commission. As this is a national body, you will not need to change anything when you shift to Queensland, apart from notifying ASIC of your change of address.

Distributing trust income

My parents have an allocated pension account from which they receive a small pension. I am wondering about distributing them some income from our family trust. The problem is NOT understanding the pension and income rules, but understanding the deeming rules for the balance of the allocated pension.

By distributing income to your parents from your trust, the income will be counted under the income test and, unless you pay that distribution to them in cash, a loan asset will have been created that will be counted by Centrelink under the assets and income tests.

This loan would be subject to the deeming rules under which all of their financial assets will be deemed to earn a specified rate of income. For a couple, this is three percent on the first $74,400 and then 4.5% on the excess.

Tax-free pensions

I will be 59 in mid-March, and my wife is 55. My wife and I have an SMSF in accumulation phase. I am thinking of starting a pension, but want to wait until it’s tax-free. I understand that should happen when I turn 60. Well, I turn 60 next year, and want to start my pension from 1 July 2012 or 2013, depending on which is better tax-wise. Basically, what I am asking is when does the pension become tax-free? Is it the full financial year in which I turn 60 or is it only from my exact birthday in March next year?

The tax treatment of a superannuation pension is based on when it is received. If you started receiving a pension from 1 July 2012, the amounts received up until you turn 60 would be taxable. If, on the other hand, your super fund paid the pension for the 2013 tax year as a lump sum after you turn 60, all of the pension would be tax-free.

Family trusts

My business partner and I purchased a business in a company structure nine years ago. My discretionary trust holds 50% of the shares and my business partner’s discretionary trust holds the other 50%. We are both directors of the company and each hold a 50% right to dividends and voting rights.

The assets of the company are goodwill, stock, bank, plant and equipment and debtors. Liabilities are creditors and a bank loan only. This amounts to $700,000. Our turnover in the company is about $2.5 million. Our only other assets are our homes, owned in our own/partner’s names, and a small amount (less than $50,000) of shares listed on the ASX, owned by trusts.

Over the last four years, my trust has distributed any profits to my three minor children, except in the first year when it had a loss. Over the last four years, my business partner’s trust has distributed approximately 27% to each of the three minor children and 9.5% each to husband and wife. If we distribute 100% each to our wives this year from our trusts, as we have a capital gain of about $200,000 each on the sale of the shares in the operating company owned by the trusts, will they qualify for any CGT concessions?

From your description, the shares owned by the trusts in the operating company will be classed as an active asset. This is because more than 80% of the value of the company is made up of active assets.

As your wives are getting all of the distribution from the family trust in the year the capital gain has been made, and because the gain has been made on the sale of an active asset, your wives should have access to the small business CGT concessions.

This would mean they could reduce the gain by the 50% general discount, reduce the remaining gain by the further 50% active asset discount, and then claim the retirement exemption on the balance of the gain remaining.

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 askmax@eurekareport.com.au