Ask Max: Your questions answered

Capital gains tax on a subdivision, SMSFs in property joint ventures, and carried forward capital losses.

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:

  • What capital gains tax is payable on a subdivision?
  • Can I buy a property from my fund?
  • How do I calculate a fund’s total return?
  • Whose name should I buy a property in?
  • Can my SMSF do a property JV with a friend?
  • Can I offset a loss incurred 11 years ago?
  • Can capital losses be carried forward after death?

What capital gains tax is payable on a subdivision?

We have a beach house and we are subdividing the land on which it stands. We are renovating the house as it slightly overlaps half of the land. After we have cut that off and remodel the house, we will keep the house and sell the land. How will we work out capital gains tax?

You will need to apportion the land value of the property when you bought it between the two blocks. You may need to get advice from a valuer to be able to do this. In addition you will be able to add to this cost a portion of the holding costs of the property being sold such as rates, improvements and interest on any loan taken out to purchase it.

Can I buy a property from my fund?

I am thinking to get my super fund property out and transferred to my name. The bank is telling me I can do it. What is your opinion?

There would be nothing stopping you selling the property from the super fund to yourself. If you wanted to transfer it as an in-specie lump sum payment you would have had to meet a condition of release before this could be done.

How do I calculate a fund’s total return?

When comparing fund returns how do you value your fund’s total return if it is in pension mode? Do you include the pension (which can vary) as part of the return?

There are two ways to calculate what the investment return of your super fund has been so that you can compare it to other funds. The first is very complicated but produces an accurate investment return. Under this method the timing of income and contributions into the fund, and payment out for pensions and new investments, is taken into account to arrive at a return for the fund.

Under the second method the total income of the fund, ignoring any contributions received, is divided by the value of the fund at the start of the financial year to arrive at the investment return. There are many accounting and SMSF administration packages available that automatically and accurately calculate the return of the fund. You should speak to the accountant for the fund to see if they can recommend something.

Whose name should I buy a property in?

My wife and I are interested in purchasing an investment property. I currently earn around $175,000 per year and she earns about $80,000 per year, although we’re likely to start a family shortly, which means she might not be drawing an income at all in the middle to longer term.

We currently own our primary residence, which is solely in my name. On one hand there are the benefits of negative gearing, which would obviously point towards placing the investment property solely in my name. On the other hand, any future capital gains or land tax considerations might point towards placing the investment property in my wife’s name, as would the income splitting capability associated with the rental revenues.

We have the flexibility of starting off with a very low or moderate deposit amount up to about $100,000. Likewise we should have the flexibility to aggressively pay off the loan within five to 10 years, or alternatively take a longer-term approach.

I’ve weighed up the pros and cons of each approach the best that I can, but can’t really see a clear direction. Is it as simple as putting the investment property in my wife’s name if we intend to pay it off in less than 10 years and putting it in my name if we intend to pay it off more slowly?

Your problem is a common one when it comes to investing. The choice between obtaining tax benefits through a negatively geared property over the long term, with the possible large capital gains tax bill at the end, compared to very small tax advantages now but with reduced capital gains tax at the end, is common.

The only way I know to correctly make a decision in this case is to do detailed calculations based on the future income earning capacity of each person concerned, how much extra cash will be produced after taking account of the negative gearing, factor in the goals of the couple such as when they plan to retire, have children etc., and then work through various scenarios to work at what produces the best result.

Taking this holistic approach means various strategies can be applied to ensure income tax benefits are maximised while at the same time minimising any future capital gains tax. Some of these strategies would include making self-employed super contributions or timing the sale of the property at a time when the high tax paying individual is retired and only earning exempt super pension income.

You should seek advice from a fee for service adviser that specialises in retirement and tax planning to do this analysis for you.

Can my SMSF do a property JV with a friend?

I am proposing to make a direct property investment with my SMSF. The proposal is to enter a joint venture with a friend of mine. She will purchase the property; I will fund the development of that property with cash from my SMSF. Is the above scenario possible?

If so, I have read that seeing as the property cannot be separated (as opposed to say a block of units or townhouses) my friend, who holds the title on the property, would transfer part of the property (tenants in common style) to me and we would then share rental income/capital gains going forward. Is this correct?

Apart from ensuring that you do not breach any of the relevant compliance issues there is nothing stopping your SMSF doing a joint venture in this property with your friend. As it is a residential property it cannot be purchased by the fund if it is currently owned by you or your friend.

In addition neither the existing property nor the new one being constructed can be rented to you. Your friend will also not be able to use the property being purchased as security for a loan to enable her to make her investment.

For this investment to be cost effective the property will need to be purchased as tenants in common between your SMSF and your friend at the time of original purchase. If it isn’t stamp duty could be paid twice on the value of the half share sold by your friend to the SMSF. An agreement should be drawn up detailing the rights and obligations of both parties. Before making this investment you should seek legal advice.

Can I offset a loss incurred 11 years ago?

If someone incurred tax losses about 11 years ago as a result of share trading activities can they offset those losses against a capital gain crystallised on shares which were sold as a result of a takeover?

Capital losses can be carried forward indefinitely to be offset against future capital gains. In your case this means you will need to establish whether the losses made 11 years ago were shown as a trading loss on your tax return, and therefore used to reduce your taxable income at that time, or were they shown as a capital loss to be carried forward.

If it was shown as a trading loss it cannot be used again to offset a capital gain. If it was a capital loss carry forward it can be used but you must be able to produce documentary evidence of how that loss was made if the tax office demands it.

Can capital losses be carried forward after death?

I’m a Eureka member in my 80s. For over 20 years I have operated a margin loan facility with a major provider. Things went well until the 2007-08 global financial crisis when I was obliged to sell down my portfolio at a loss to avoid any margin call. I’m a well qualified, experienced investor and my reduced portfolio is in good shape now, but I’m left with fairly substantial capital losses carried forward. I live off dividend income. If the capital losses still exist upon my death, is their CGT deductibility lost?

Unfortunately carried forward capital losses relate to the individual taxpayer and do not pass to any of the deceased beneficiaries when they die. You may want to consider doing some re-balancing of your portfolio that will produce capital gains that can be offset by your carried forward losses. Before embarking on the strategy you should seek professional advice.


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