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.
- Property and tax-exempt status.
- When I die, can I transfer my shares to my son?
- Starting a pension.
- Taxable income and health care cards.
- Can I transfer my UK super to my Australian fund?
- Transferring a family business property to an SMSF.
Capital gains tax
My husband and I are joint proprietors of our marital home, which was built before capital gains tax. When one of us dies, is the property assessed for CGT from the date of death? Or does the tax-exempt status persist until the second partner dies?
The capital gains tax exemption for a couple’s home applies as long as it is their only home. When one of you dies, the exemption will still apply. It would even apply if you went off caravanning for up to six years, rented out your home and did not purchase a new home.
The major portion of the balance in my SMSF is in shares. When I die, can my son pay the 16.5% tax in cash and have the share portfolio transferred to him or do the shares have to be sold? Regardless of whether he can keep the shares or not, is the tax calculated on the purchase price of the shares or the value at the time of my death?
When you die, the shares will need to either be sold or paid as an in-specie distribution to your son, as he will not be classed as a dependent. Capital gains tax will be payable at that time on the difference between the shares’ cost and either their net sale proceeds or market value at the time of transfer.
Could you please tell me what I can I do with my SMSF when I turn 65 in October 2012? I am retired and no longer working. My understanding is that I can no longer make any concessional or non-concessional contributions when I am over 65 years old. Do I have to start a pension immediately in October?
Between July and October, can I make a non-concessional contribution up to $250,000 and concessional contribution up to $25,000? Between October and June 30, can I keep the super fund in accumulative mode and thus pay 15% tax on the fund earnings? What is the required age that I have to start a pension?
If you are retired – in other words, not able to meet the work test of 40 hours in a continuous 30-day period – you will not be able to make any more super contributions once you turn 65. Before turning 65, you can make a non-concessional contribution of up to $450,000 if you have not exceeded the $150,000 limit in the last three years, and also make a concessional contribution of up to $25,000.
As you are retired, you can start a pension from your super fund at any time. You can also keep your super fund in accumulation fund indefinitely, as there is no requirement for you to start a pension at any age.
Health care cards
My partner and I are both in our 70s. We both qualify for the Commonwealth Seniors Health Card as individuals. If I decide to move in with my partner and we apply for the card as a couple, we still meet the criteria as far as taxable income goes, but not if we include the pension from super. Does adjusted taxable income refer to taxable income listed on a tax return plus the super fund pension?
The adjusted taxable income that Centrelink counts for age pension and low income health care card eligibility includes the following:
- employment and self-employed income
- employer-provided fringe benefits
- rental income
- reportable superannuation contributions, also known as salary sacrifice contributions
- Centrelink pensions or benefits and some supplementary payments
- Department of Veteran Affairs payments
- deemed income from financial investments
- income streams, such as account-based pensions annuities and superannuation pensions
- foreign income
- income received from private trusts and companies
- compensation payments received
- new enterprise incentive scheme payments received
- paid parental leave
- lump sum payments, such as redundancy or termination payments
Where your income includes a tax-free superannuation pension, the total amount received is not included as adjusted taxable income. The pension received is reduced by its purchase price. This is calculated by dividing the value of your superannuation account when the pension commenced by your life expectancy at that time.
As an Australian working in London, I’ve been contributing to a UK super fund. I plan on returning to Australia next year and wanted to know if there are any issues, assuming the funds permit it, to transfer the UK super into my Australian super fund, or would it make more sense to leave it in the UK? I’ve contributed £60,000 in 3 years to the UK plan and I will retire in Australia in 15 years’ time.
To roll over funds held in a UK super account, the Australian super fund must be an approved fund to receive the rollover. This can be quite a complicated process, but there are some funds able to receive the UK super that can assist with this.
As to when you do this, it will come down to you assessing how much your UK super will either go up or down in value while you wait until the Australian dollar devalues against the pound. Once you return to Australia and resume being an Australian resident for income tax purposes, you have up to six months to transfer the superannuation without any tax being payable.
If your superannuation is transferred after six months, tax will be payable at 15% on the earnings of the UK fund after having moved to Australia. In practical terms, this in most cases will be the difference between the value of the UK fund at the time you left and the value transferred to the Australian super fund.
I thought I had a pretty good understanding of the contribution rules but you highlighted a particular scenario I had never considered. Is it true that if the three-year, bring-forward rule is triggered before turning 65, you can still contribute the remainder of a $450,000 contribution (or part thereof) after you turn 65, as long as you pass the work test?
Yes, that is correct. The problem is that if you are contributing more than $150,000, this must be broken down into two or more payments as trustees are not able to receive non-concessional contributions of more than $150,000 in a lump sum for someone 65 or older.
Family business property
If the family business property is transferred into an SMSF, there are substantial tax benefits. What are the implications as far as succession goes? It looks to me that there may be substantial hurdles retaining the property in 'the family’ once it is contained in an SMSF. How does the next generation fund retention of the property?
I am not sure what the substantial tax benefits you are referring to are, other than that the rent would not be taxable if the super fund is paying a pension. If a business property is held in a super fund, and the members die, the property would either pass to the estate of the deceased member or directly to a beneficiary who is the subject of a binding death benefit nomination.
As the property can be distributed to either the estate or the beneficiary as an in-specie payment, no funds will be required to facilitate the transfer. Tax will be payable by the superannuation fund on any increase in the value of the property from the date it was transferred into the SMSF. If the business property was instead owned by a family trust, and control of the family trust passed to the next generation upon your death, no tax would be payable.
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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