Ask Max: Your questions answered

Capital Gains Tax and property, non-resident tax rules, and is superannuation choice mandatory for employers?

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 members.

This week:

  • The CGT rules on property
  • What are the tax rules for non-residents?
  • Buying property, partially through a SMSF.
  • Combining bank accounts in a super fund.
  • Forcing an employer to pay into a SMSF.

Capital Gains Tax on property

I bought a property back in 1999 and used it as my main residence until 2003 when I purchased a second property and moved to this new property. I transferred the existing property’s title to my wife and she rented the property. If my wife sells this property now, how is the capital gain determined? Also, will a council valuation be enough to determine the property value?

As the property had been your main residence, no tax would have been paid on the increase in the value up to the time you transferred it to your wife. She will pay tax on half of the increase in the value of the property from 2003 until she sells it.

A council valuation at the time the transfer took place is not really suitable as there is a high likelihood that this value would be lower than what the actual market value was. You should engage the services of a property valuer that can place a value on the property at the time it was transferred.

Tax rules for non-residents

My wife and I are Australian citizens who left Australia in 1981 before the introduction of the current Tax File Number system. We’ve bought an apartment off the plan in my wife’s name as our retirement home. When the apartment is built and delivered next year, my wife will retire and “live” in Melbourne with frequent travelling to Hong Kong and Malaysia.

I will continue to live in Hong Kong, before relocating to Australia for good. The joint bank accounts we hold in Australia are designated as non-resident and therefore 10% withholding tax is deducted from all interest income.

Our plan is to purchase one or two more investment properties in Melbourne so that we (or at least my wife) can live on the rental income.

  1. Should the investment properties be purchased solely in my wife’s name?
  2. When my wife becomes an Australian tax resident, should we terminate the joint bank accounts so that we can be taxed separately?
  3. Will I be deemed to be an Australian tax resident, when she becomes one even though I don’t stay more than two months per year in Australia?
  4. When I eventually become an Australian tax resident, will all the income arising from my overseas assets be subject to Australian tax?
  5. How do I prevent this from happening?
  6. Would setting up a trust offshore solve the problem?

The answers to your questions in order are as follows:

  1. From the way you have described this property it is really going to be used as a residence rather than for investment purposes. It does not matter whether the home is purchased in joint names, or just your wife’s name, as long as the property is not sold before you return to Australia and take up residency.
  2. If your wife is going to have taxable income of less than $19,000, including any interest earned on the bank account, an account should be opened in her name and the funds transferred into this.
  3. As you will still be living and working in Hong Kong you will not be classed as an Australian resident for income tax purposes.
  4. Yes, once you become an Australian resident your worldwide income will be taxed in Australia.
  5. The only way to stop this would be to not move to Australia and not become a resident for tax purposes.
  6. A trust would not help you in this situation. You should seek professional advice so that your total financial and taxation affairs can be taken into account to ensure that you maximise your income in retirement.

Buying an investment property

We are considering purchasing an investment property, partly by our SMSF and partly by the trustees. One of the two members is in pension phase, with the other preferring to remain in accumulation due to Centrelink benefits for the older member.

We have sufficient funds within our super, along with funds outside of super, to enable the purchase to proceed without borrowing. What difficulties do you envisage with this strategy?

The biggest risk I see about this strategy is that now is not the right time to be buying an investment property in your SMSF. As one of your members is in pension phase, and the other is five years away from receiving a pension, you should be concentrating on investments with high income rather than those with the potential for capital growth.

Another problem with having a property making up a large part of an SMSF, when it is in pension phase, is that as the members age the minimum pension required to be paid increases. If the property is returning a net income of 4%, and the minimum pension that must be taken is 5% or higher, the fund could experience severe cash flow problems and be forced to sell other investments to fund the pension.

Complex SMSF structures

I run our SMSF for myself and my husband. The fund has segregated allocated pensions, reflecting our different holdings and investment strategies. Each allocated pension has separate bank accounts, separate investment registers, and separate equity accounts within the SMSF. Each allocated pension has a different proportion of assets, which are taxable on inheritance by a non dependant.

My reason to hold segregated accounts is to preserve the proportions in each account which are taxable on inheritance. Thus our fund has a total of total of six member accounts as allocated pensions, each with different proportions of concessional components, and an accumulation account for our son and for ourselves.

Our fund now has a new auditor who is horrified by this complexity. The auditor has suggested I combine all funds except our son’s into one bank account. If I consolidate the accounts will I be able to preserve the proportions of each segregated account?

It does sound as though you have made the management of your SMSF unduly complicated. Having separate accounts and investment strategies does not affect the concessional and non-concessional components of each of your accounts. Once a pension is started the percentage of these two components is fixed.

I am not sure what the auditor is proposing is necessarily the best solution. You really only need one bank account for the accounts in accumulation phase, and another bank account for the pension accounts. You do not need to have different investments for each pension.

Employer contributions to a SMSF

My husband and I have a SMSF. However, my employer, a private school conglomerate, will not pay my super into our fund. They insist that under the industrial agreement for teachers in the NSW non-government schools sector they are only obligated to offer a choice of two funds and continue to pay it to NGS Super. They will allow me to transfer it to our fund for a $30 fee. I want it to go directly to our fund to avoid double administration costs. Am I able to force them to pay my super into our SMSF?

Unfortunately when choice of superannuation legislation was brought in it did not apply equally to everyone. As you have found, under some awards employers are required to contribute to an industry fund. You will unfortunately therefore be forced to have your employer’s contributions, and any salary sacrifice contributions, continue to be made to the industry fund. You will also unfortunately be forced into paying the $30 fee when you roll over the funds into your SMSF.

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