Tax with Max: A super property dilemma

Property investment and the super switch; selling shares for tax purposes.

Summary: The Government's super changes offer opportunities for investment property owners as well as share-owning superannuants. 

Key take-out: Superannuants should seriously consider selling rental properties so that the proceeds can be contributed to superannuation before June 30, 2017.

Key beneficiaries: Retirees, superannuants. Category: Tax, property, superannuation. 

Q. I am 63, retired, and have an SMSF with an account based pension worth $1.4 million. In addition to my superannuation I have an investment property purchased 20 years ago for $200,000 that is now worth $700,000. I still owe $200,000 from when I originally purchased the property. I had thought about selling this property but the changes to superannuation announced in this year’s budget left me thinking I should hold onto it.

I have seen that the Government is changing its superannuation policy they took to the election and am not sure whether I should rethink my decision to hold onto the property. Can you tell me how the revised superannuation changes will work and whether I should try and sell the property so that I have the funds before June 30 next year?

Answer: The superannuation changes announced in this year’s federal budget, with two notable exceptions, will largely proceed unchanged if they are passed by both houses of federal Parliament. Those two exceptions will, on the one hand, remove the retrospective aspect of the change to non-concessional super contributions (NCCs), which is welcomed. On the other hand, the removal of the work test for people aged 65 and older will not go ahead, which is unwelcome.

Originally the $500,000 lifetime limit on non-concessional contributions (NCCs) was to apply from May 3 this year. That retrospective change to NCCs has been removed with the annual limit reducing from $180,000 per year to $100,000 per year, with the new contribution limits applying from July 1 next year.

People under the age of 65 will still be eligible to bring forward NCCs and contribute up to $300,000. It would appear that the lifetime limit of $500,000 has been dropped. In its place there will be a restriction on anyone making NCCs when their superannuation balance is more than $1.6 million.

The value of a person’s superannuation in relation to the $1.6m limit will be assessed at June 30 for the previous financial year. Therefore anyone with superannuation of less than $1.6m at June 30, 2017 will still be eligible to make further non-concessional contributions.

When the bring forward rule is triggered in either the 2016 or the 2017 financial years, but the limit has not been fully used, transition rules will apply to the amount of further contributions. This means for anyone under 65, who contributed more than $180,000 in the 2016 financial year, the maximum NCC that can be made will be $460,000. This is made up of the $180,000 for the 2016 and 2017 years, plus the $100,000 limit for the 2018 year.

If someone under 65 contributes more than $180,000 during the 2017 financial year they will have a total limit for their non-concessional contributions of $380,000. This is made up of the $180,000 limit for the 2017 year, and $100,000 limits for the 2018 and the 2019 years.

For small business owners there is an additional limit on NCCs of $1.415m that applies to capital gains made on the sale of a small business when the owner or owners are retiring.

The reduction in the current tax deductible concessional contributions of $30,000 for people under 50, and $35,000 for anyone 50 and older, will proceed with a NCC limit of $25,000 for everybody from July 1, 2017.

Although there is no guarantee that the superannuation changes will become legislation you should seriously consider selling the rental property so that the proceeds can be contributed to superannuation before June 30, 2017.

By doing this you will be able to reduce the tax payable on the taxable capital gain of $250,000 by making a self employed tax-deductible concessional super contribution of $35,000. This will result in superannuation contributions tax being paid of $5250, compared with income tax of $17,150 on the $35,000 if no tax-deductible contribution is made.

In addition, as your superannuation balance is below the $1.6 million limit, and as long as you have not exceeded the previous $180,000 non-concessional contribution limits in any of the three previous financial years, you would be able to make an NCC before June 30, 2017 of $380,000.

If you chose to hold on to the rental property and are forced to sell it in future years when you are over 65, unless you are able to pass the 40-hour work test that will still apply for people aged 65 to 75, you will not be able to reduce income tax payable by making a tax-deductible concessional contribution, and you will not be able to make a non-concessional super contribution.

If you decide to sell the property and maximise your super contributions prior to June 30, 2017 your superannuation balance will exceed the $1.6m limit on pension accounts. This will just result in you having the excess in an accumulation account.

I cannot see any downside of you making the decision to sell the property now and making the super contributions, other than the fact that the rental property may increase in value even more and you would therefore miss out on this extra profit. But before making a decision you should seek professional advice in case there are other strategic tax and retirement planning steps that you should take.

Q. I am 62, semi-retired with an adequate pension from an industry fund, and about $40,000 in blue chip shares which I started buying in 2009. I wish to simplify my life and am considering selling all of my shares. While some shares have done really well others have plunged. What should I consider before selling?

Answer: The first thing you need to calculate is exactly what net capital gain you will be making on the shares being sold. The net capital gain will be made up of the shares that you are selling at a profit, minus the loss you will be making on the shares that have dropped in value.

As long as all of the shares have been owned for more than 12 months the net capital gain made can be reduced by the general 50 per cent CGT discount available to individuals. This taxable capital gain will then be added to your other taxable income and tax paid at the relevant marginal tax rate.

If being semi-retired means that you are still employed you may not be able to reduce the tax payable on the assessible capital gain made unless you meet the current self employed tax deductible concessional contribution rules.

These rules do not allow a person who is employed to make a tax-deductible concessional contribution unless their employment income is less than 10 per cent of their total taxable income.

If you are still working and receiving employer super contributions, and are not eligible to make a self employed super contribution, you should consider not selling the shares until after June 30, 2017. If the change to the rules about tax deductible personal super contributions becomes legislation you could make a tax-deductible concessional contribution under the new rules that will apply from then, up to the relevant contribution limit.


Got a question for the Tax with Max column? Email: askmax@eurekareport.com.au

General Advice warning: Eureka Report Pty Ltd: ABN: 84 111 063 686 AFSL No: 433424. This article may contain general advice and has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider if it is appropriate for your circumstances. Where the information relates to the acquisition of a product, you should obtain the PDS and consider this before making your decision.