CGT concessions and super benefits

Summary: CGT, small businesses and property; claiming CGT relief; keeping assets in super; and the work test.

Key take-out: Those running a business, aged over 65 and under 75, need to keep a diary to prove they've satisfied the work test.

Question:  If a percentage of a person's main residence is used to run a business, with the relevant tax deductions being claimed for the property related expenses, am I right in saying that the small business CGT concessions can be used to decrease any tax payable on the business percentage when the property is sold? If the 15-year retirement CGT concession is used, could you put all or part of the capital gain into superannuation, and is the amount contributed affected by the $1.6 million total superannuation balance limit?

Also, if I had a total super balance of $1.7 million, and part of that balance is $300,000 contributed under the 15-year retirement concession, would I still be able to make non-concessional and concessional contributions until my balance reached $1.9 million?

Answer:  Under the 15-year retirement small business CGT concession you can disregard the capital gain made on the sale of the business component of your property, and do not need to apply any other concessions. You also do not have to apply capital losses against your capital gain before applying the 15-year exemption.

You can claim the 15-year retirement CGT exemption on the capital gain you make up to the lifetime limit, which is indexed annually. The limit for the 2017 financial year was $1,415,000.

Unfortunately, the amount claimed under the 15-year CGT exemption has no effect on the $1.6 million total superannuation balance limit. If your superannuation exceeded $1.6 million, after claiming the CGT concession, you could only make deductible concessional super contributions.

Question:  I have an SMSF with over $1.6 million in pension phase that claimed the CGT relief on a share purchased in 2003 for $10 that had a value at June 30, 2017 of $50. If that share was sold before June 30, 2018 for $33 did it make a capital loss or a gain.

Answer:  Under the CGT relief available to SMSFs that had to roll back to an accumulation account the excess a member had over $1.6 million limit, the cost base of those assets is reset to the market value at June 30, 2017.

When an asset is sold where the CGT relief has been claimed, a capital gain or capital loss is made based on a purchase price of the value of the asset at June 30, 2017. This means for the share sold at $33 a capital loss of $17 has been made per share. Interestingly, if the share had made a capital gain the SMSF could not use the CGT discount as it was sold in less than 12 months of its new purchase date.

Question:  I am a retired public servant aged 67, living comfortably on my indexed pension of $50,000 and have $330,000 in a Colonial First State super account and $250,000 in share holdings. My spouse has similar assets, but we keep our finances separate.

I am interested in moving my money out of super and into shares, mostly low-cost LICs and ETFs. I am aware that super is tax advantaged, but have an inclination to remove my money from that structure and have complete control of it. I have been investing for many years and am confident of my ability in that regard.

How much am I disadvantaging myself by moving out of superannuation? I am thinking the extremely low cost of ETFs in particular compares favourably with those in super and is perhaps enough to outweigh the tax differential.

Answer:  The answer to your question will depend on whether the $50,000 indexed is from an untaxed source. If it is from a tax source and therefore not included in your taxable income you may be better off taking the money out of the superannuation system.

If, as with most of the older lifetime pensions, yours is from an untaxed source it will be included in your taxable income each year. By removing your money from the superannuation system I believe you would be severely disadvantaging yourself from an income tax point of view.

This is because the income from the $330,000 would be added to your investment income and the indexed pension, and taxed at least at 34.5 per cent including the Medicare Levy. If you kept it in superannuation the tax payable would be 15 per cent.

The problem is not you having $330,000 in superannuation; it lies with the fact that you are using Colonial First State, which is a commercial fund that more than likely has much higher fees than your alternatives.

You should look at rolling over your superannuation into an industry fund which allows members to invest directly in shares for a slight increase in fee.

Before making a decision to roll over your superannuation to an industry fund, or withdraw the balance of your Colonial First State account, you should seek professional advice to make sure that you will not be disadvantaged tax wise and to see how much your saving in fees would be if you rolled over to an industry fund.

Question:  My wife and I are both over 65 but under 75 with less than $1.6 million in the fund. Can we contribute non-deductible funds to our super fund and, if so, how much? Do we need to pass the work test? We are self-employed running a successful Airbnb and have worked more than 40 hours in the last 30 days. What proof do we need to have to qualify to put more money into our SMSF?

Answer:  Because you have less than the $1.6 million total superannuation balance you will each be able to make both deductible concessional contributions up to $25,000, and non-concessional after-tax contributions of $100,000 each.

From a point of view of proof, you should keep a diary showing the hours worked in your business over a 30-day period during the year that you make the super contributions. As long as this diary showed that you had worked at least 40 hours each, you could make the contributions and satisfy a request by the ATO to prove that you have.

Question:  We have four trustees in our SMSF. Two are retired and both had more than $1.6 million at June 30, 2017 in pension phase. The extra has been transferred to an accumulation account. We use the actuarial method. The other two members aged in their early 30s and are in accumulation phase. We are applying the CGT relief for some of our shares for the retired trustees. Can we do the same for the two members in accumulation phase? If we can't, I assume we will need to work out the CGT on all the shares?

Answer:  The ability to claim CGT relief on assets in an SMSF was limited to the amount that members exceeded the $1.6 million pension limit. Because you are using the actuarial method this will mean the CGT relief will in effect apply to the fund as a whole.

For the 2018 and subsequent years the realised capital gain on shares will need to be calculated and included in the taxable income of the fund. Tax will be payable on the assessable gain based on what the value of the accumulation member accounts is as a percentage of the total value of the fund.

By having claimed the CGT relief on some shares the assessable capital gain will be reduced when they are sold by the increase in the value since June 30, 2018.

Because you have two members in accumulation phase that are in their 30s, and you also have accumulation accounts, you should seek professional advice about the tax benefits of rolling out the accumulation accounts into another super fund.

If you have a question for Max Newnham please email it directly to max@taxbiz.com.au