I am part of a family trust started by my father in 1990 in New Zealand, where the rest of my family live. The trust is to be wound up some time in October or November. Tax is fully paid in New Zealand. When the funds are distributed, do I need to declare it? If so, am I going to be liable for tax, which has already been paid in New Zealand? I have had conflicting advice one says nothing to declare, the other says to add to my income for that year, and pay more tax. J.B.
You will need to declare the income here. However, the Australia and New Zealand tax treaty (the key points of which are available on the ATO website) states that in the case of a trust, double tax relief will be allowed by the country of residence (Australia in your case) for any tax imposed by the other (New Zealand).
If you want to get more details, you will need to sit down with a tax accountant and show the breakdown of the proposed trust distribution.
SAVE BY NOT SACRIFICING
I turned 60 in March of this year and earn about $26,000 on a permanent part-time basis, of which I salary sacrifice 99 per cent. I also receive a government pension of $29,500 annually, which is now not assessable as income for tax purposes. Given the new tax scales in 2012-13, what is the optimum amount that I should sacrifice for the financial year? That is, at which point does sacrificing offer no advantage to me? T.M.
The last time a letter was published here discussing a "government pension", there was a flurry of complaints about its size, so we should point out that this is a superannuation pension and not a Centrelink pension. Since it is non-assessable, it would be a state rather than a Commonwealth super pension.
The maximum you can salary sacrifice in 2012-13 is $25,000 although, mathematically, it would not be in your interest to do so. To explain, when you salary sacrifice, the total amount going into the super fund is taxed at 15 per cent.
If, instead, you pay tax on your personal income this financial year, the first $18,200 is untaxed and the next tax bracket of 19 per cent applies to income from $18,201 up to $37,000. The Medicare levy of 1.5 per cent applies from $24,167.
Your optimum situation, then, is to salary sacrifice just the balance above $18,200, or $7800. If you want to contribute the remaining untaxed amount into your super fund, it can go in as a non-concessional contribution and not be taxed on entry, always assuming you have not exceeded the $450,000 cap in the past three years.
FINE POINTS OF FEES
I am a single female retiree and not gifted in things mathematical or financial. My financial adviser some years ago placed me into two super funds, one being an allocated pension and the other a managed fund, both with the same fund manager. In the present economic climate my capital is fast eroding, especially with the fees my financial adviser gets and the fund manager's fees. Am
I entitled to claim the trailing commission at the expense of the financial adviser? C.M.
You are able to disassociate your investment from an advisory firm and either request that no adviser be appointed or appoint another one of your choosing. Trailing commission, usually between 0.4 per cent to 0.6 per cent a year, is paid out of the fund manager's fees so, if no adviser is appointed, the fund manager simply retains the management fee.
Most current managed funds offer an "adviser service fee" which you, as the client, agree to pay to your adviser and which is shown on your regular fund statements. In such cases, the fund manager's fee is reduced, or should be.
However, the newly introduced Future of Financial Advice, or FOFA, rules have seen a swing away from either trail or service fees paid by managed funds. Instead, advisory firms, most of which are now owned by banks and insurance companies, have converted to a "portfolio service" structure where the entire portfolio is left with the adviser for a fee charged as a percentage of assets, up to about 1 per cent a year.
The portfolio then invests in direct investments such as term deposits, shares or bonds, as well as wholesale funds that should pay no fee to the adviser.
In addition, super funds are able to now offer limited advice over the phone to their fund members while accountants are to be offered ASIC licences allowing them to give financial advice on SMSFs and "class of product" advice about superannuation products, securities, insurance and basic deposit products. The licences will be offered from July 2013 with a three-year transition period.
The corollary to this is that there is a decreasing availability of one-off, good-quality and unrestricted independent advice at a reasonable price which, one could argue, was the ultimate goal of the recent changes.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808 pensions, 13 23 00.
Frequently Asked Questions about this Article…
Do I need to declare a distribution from a New Zealand family trust to the Australian Taxation Office?
Yes. If you receive a distribution from a New Zealand trust and you are an Australian resident for tax purposes, you must declare that income in Australia. The Australia–New Zealand tax treaty allows for double tax relief in the country of residence (Australia) for tax already paid in New Zealand, but you should show the distribution on your Australian tax return.
How does the Australia–New Zealand tax treaty affect double taxation on trust distributions?
The Australia–New Zealand tax treaty provides double tax relief for trust income: Australia (your country of residence) should allow relief for tax already imposed by New Zealand. To apply relief correctly you will typically need to provide documentation showing the tax paid in New Zealand and the breakdown of the distribution.
Should I see a tax accountant about a cross‑border trust distribution?
Yes. The article recommends sitting down with a tax accountant and showing the detailed breakdown of the proposed trust distribution so they can calculate any Australian tax liability and apply the appropriate treaty relief.
What is the maximum salary sacrifice limit for 2012–13 and is it always beneficial to sacrifice the maximum?
The maximum you could salary sacrifice in 2012–13 was $25,000, but that does not mean it is always beneficial to sacrifice the maximum. Employer contributions and salary‑sacrificed amounts are taxed in the super fund at 15%, so depending on your personal taxable income and tax brackets, sacrificing the full cap may not be optimal.
For someone earning around $26,000 plus a non‑assessable super pension, what is the ‘optimum’ salary sacrifice amount in 2012–13?
Using the 2012–13 tax scales shown in the article, the optimum was to salary sacrifice only the balance above the tax‑free threshold of $18,200. For the example given (earnings of about $26,000), that equated to $7,800 of salary sacrifice. Any remaining untaxed amount could be contributed as a non‑concessional (after‑tax) contribution, subject to the contribution caps.
What tax rates and Medicare thresholds were relevant to the salary sacrifice example in 2012–13?
According to the article, the tax‑free threshold was $18,200, the 19% marginal rate applied to income from $18,201 up to $37,000, and the Medicare levy of 1.5% applied from $24,167. Super contributions going into the fund were taxed at 15%.
What are trailing commissions and can I stop paying them if I don’t want an adviser?
Trailing commissions (typically about 0.4%–0.6% a year) are paid to advisers out of the fund manager’s fees. You can disassociate your investment from an advisory firm and request no adviser be appointed; in that case the fund manager generally retains the management fee that would have funded the trail. Many funds now show an adviser service fee on statements, which the client agrees to pay directly instead.
How have FOFA reforms changed adviser fees and the way financial advice is charged?
The Future of Financial Advice (FOFA) reforms have driven a move away from trail or service fees paid by managed funds toward ‘portfolio service’ structures where advisers charge a fee based on a percentage of assets (up to about 1% a year). The portfolio then typically uses direct investments and wholesale funds (which should pay no fee to the adviser). The article also notes that accountants were to be offered ASIC licences from July 2013 (with a three‑year transition) to give limited class‑of‑product advice on SMSFs and related products, and that availability of one‑off independent advice at a reasonable price appeared to be decreasing.
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