Ask Max: Your questions answered
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:
- Paying tax on a property that is now the family home
- Can I get an ATO refund on foreign tax paid?
- Clarifying the “bring-forward” rule for non-concessional contributions
- Transferring super funds to my wife’s account
- Returning capital and profits from the US to Australia
- Pooling super funds to buy a property
- Transferring property from a trust
- Also see Max on video, answering questions on capital gains tax.
Paying tax on a property that is now the family home
My husband purchased an investment property in 2004 for $267,000 (pretty much land value only) and subsequently rented it out for five years. Our intention was always to rent the property until we could afford to build on it and move in. In 2009 we bulldozed the existing property and built a new family home and moved in, with a build cost of approximately $600,000. I have been advised that if we sell the property it will be subject to capital gains tax (which seems ludicrous as it’s our family home) – can you outline what the CGT requirement would be?
As the property will not have been your principal place of residence for the entire ownership period capital gains tax will be payable when the property is sold. No capital gains tax will be payable on the increase in the value from when the property became your residence. Capital gains tax will be payable on the increase in the value of the property from when it was purchased in 2004 up until it became vacant land and you built your home.
Can I get an ATO refund on foreign tax paid?
My wife and I have segregated accounts because our age difference is 10 years and we are in different phases. She is accumulating and I am drawing a pre-retirement pension. We want to use some of my account balance to buy a UK property and rent it out for five years.
We believe the rental income will be taxed in the UK. Can the fund claim a tax refund from the ATO? We then plan to transfer the property out of the super fund when I am 65, and live in it for four months each year. The rest of the year we will live in Sydney. Can you see anything wrong with this strategy? Is the strategy negated if we use some of my wife’s account balance to fund the property?
Foreign taxes paid cannot produce a refund from the ATO. If the property is allocated to your pension account to receive no benefit from the UK, tax is paid. It would be better if you can allocate the property to your wife’s accumulation account so that the UK taxes will reduce the tax payable on the income generated in the super fund.
I see nothing wrong with what you are planning to do as the purchase of the property is clearly to provide retirement benefits. You will need to get the timing right when ownership is transferred. If the property is paid as an in-specie lump sum payment to you upon retirement capital gains tax would be payable by your fund. You should seek professional advice to make sure your tax benefits are maximised.
Clarifying the “bring-forward” rule for non-concessional contributions
Could you please clarify the “bring-forward” rule for non-concessional contributions to super? I had thought it meant that $450,000 could be contributed over three financial years. So for example, $300,000 in year one, $100,000 in year two and $50,000 in year three, in as many transactions as may be necessary.
Under the bring forward rules you can either contribute $450,000 in the first year, and then nothing for the next two years, or you can make several contributions over the three years as long as the $150,000 is exceeded in the first year. What you have proposed could therefore be done.
Transferring super funds to my wife’s account
My wife and I have an SMSF which is divided into three accounts. One is in my name, which holds the majority and is in the pension phase with 82%; another is also in my name, which holds a small amount of about 1%; and the rest is in my wife’s name with 17% that is still in the accumulation phase. My wife is 63 and I am 66.
Is it correct that if I was to transfer a reasonable amount from my name to put it into my wife’s account this would reduce the amount I have to draw as a pension and thereby help to increase the amount of the small Centrelink pensions we receive through DVA? The other reason for doing this is to add to the amount held in my wife’s account. We tend to transfer the majority of the pension I have to withdraw into her account as a spouse contribution each year unless we need it for a large purchase.
As you are of pension age the value of your superannuation would be counted as an asset. The only way you could do the transfer would be to have the money paid out of the fund to you. You would then have your wife make a non-concessional contribution up to her relevant limit.
You should seek professional advice before doing anything as I believe there is a chance the money contributed by your wife could be classed as a gift by you to her and so it would still be classed as your asset for up to five years.
Returning capital and profits from the US to Australia
I would like to ask about the tax situation between US and Australia. I would like to buy US stocks and we are also investigating purchase of property there. Naturally, none of this is of value unless we can return the capital and any profits back to Australia.
There are no restrictions that I know of that would stop you doing what you want to do. You should however get advice from either a US accountant or someone in Australia that specialises in this advice.
Pooling super funds to buy a property
We have a SMSF set up for our family and have a few friends with a similar set-up. We are thinking about pooling the funds in our SMSF accounts to buy semi-rural land in the outskirts of Sydney meant for rezoning. The land will be held for five to 10 years when most of us are about to retire. What structure will suit such an arrangement? Will it be possible for us to register a company or trust that will hold the property and all the SMSFs will have a shareholding?
The property could be purchased using a unit trust, a partnership or as a joint venture with each SMSF’s ownership percentage being stated. If a company is used it will pay capital gains tax without the benefit of the 50% general discount. To minimise the tax payable on the venture it would be best if the property was sold while the super funds are in pension phase as no tax would be payable on the gain.
Transferring property from a trust
I am considering transferring my family trust property into my ownership as my principal residence as part of the process of eventually vesting the trust as I am the sole beneficiary of the trust. After the transfer of the sale proceeds into the trust’s account, can I withdraw that money to purchase an investment property in my name?
As you are the sole beneficiary of the trust you will be able to withdraw the funds in the trust to purchase an investment property. You will need to take account of tax payable on any profit made on the sale of the property from the trust to you.
If you will be borrowing to purchase the property from the trust it will not make sense to use the funds withdrawn from it to buy the rental property. Instead those funds should be used to reduce the loan on your home as much as possible and therefore maximize the borrowing on the rental property.
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