Tax with Max: Capital gains tax on inherited property

Capital gains tax, deeming rates, the SAPTO and LITO, and more.

Summary: What are the capital gains tax consequences when a property is inherited and it is then rented out? Under the law, if the property was purchased by the deceased before September 1985, the property is deemed to be an investment asset from the time it was inherited. Tax would be payable on the difference in price between when the property was inherited and when it was sold.

Key take-out: If the inherited property was used as a principal place of residence, no tax would be payable.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Capital gains tax on inherited property

I have a property which I inherited and have rented out for five years. I find I can now subdivide it into two lots. I would like to build on one lot for myself to live in and sell the other lot or transfer it to my son. The property was valued at $600,000 when I inherited it and is now valued by an estate agent at approximately $900,000. Can you tell me what amount I would be liable for in capital gains tax, or the most effective way to go about this?

Answer: Under the capital gains tax law, where an asset is inherited that was purchased by the deceased before September 1985 the person inheriting the asset has as their purchase cost its market value at the date of death of the owner.

As you have been renting the property since you inherited it, rather than having moved into it and used it as your principal place of residence, capital gains tax will be paid by you when you dispose of it. If you transfer or sell one of the lots to your son, capital gains tax would be payable by you on 50% of the gain you make at that date. This would more than likely be 50% of $150,000.

If you build on the other lot and move into it and it becomes your principal place of residence capital gains tax would not be payable by you until you sold it. As half of the property is currently worth $450,000, and your effective purchase price is $300,000, you would pay capital gains tax on half of $150,000 when you sold it. The increase in the value of the property after you moved into it, as your principal place of residence, would not be taxable. Due to the complexities relating to capital gains tax law you should seek professional advice before doing anything.

How does one qualify for the existing deeming rates before they change?

I will be 65 on May 30, 2014 and have about $460,000 in my superannuation account. Do I have to retire before December 31 this year to take benefit of the current treatment of superannuation pensions and not have the deeming rates applied?

Answer: If you want your account-based pension counted under the existing rules your need to start it before December 31 and also be in receipt of some form of Commonwealth income benefit such as the age pension. If both of these things don’t happen by this due date the deeming rates will be applied to the value of your superannuation.

How are the SAPTO and LITO tax offsets calculated?

As most of my funds are in an SMSF that is in pension mode my personal taxable income last year was only $30,706 and so I qualify for the Senior And Pensioners Tax Offset and the Low Income Tax Offset, which reduced the tax payable to nil. I have been unable to find on the ATO website how the SAPTO is calculated and what the maximum amount is. For the LITO it appears to be up to a maximum of $445 if income is under $37,000. I would be grateful if you could explain how these two items are calculated, and what the maximum amount is?

Answer: You are right about the maximum amount for the LITO being $445 where a person’s income is less than $37,000. Once the income threshold is exceeded LITO decreases at 1.5 cents for every excess dollar, and ceases altogether once a person’s income reaches $66,667.

The SAPTO is meant to increase each year and is announced as a part of the federal budget. I must admit that I have not found anything in the 2014 budget that states what SAPTO will be for the 2014 year. SAPTO is available for age and service age pensioners and self-funded retirees of age pension age.

The offset for the 2013 tax year was a maximum of $2,230 for singles is $1,602 for each member of a couple. The maximum offset is received where the income for a single person is less than $32,279 and for a couple if their combined income is less than $57,948. Once these income thresholds are exceeded the rebate reduces by 12.5 cents for every dollar above the threshold and cuts out entirely at $50,119 for singles and $83,580 for couples.

What is the tax-free income threshold for children?

I think you should have explained the low income tax offset better. As I understand it, and correct me if I got it wrong, children can earn $3,333 per year tax free?

Answer: Historically you are correct but currently you are, unfortunately, wrong. Amounts distributed to minors from a family trust are tax-free up to $416, then have tax paid at 66% on the next $890, and then tax at 45% on income over $1,307. The reason why children could have had the higher amount distributed to them tax-free was due to the low income tax offset that, at that time, was $1,500. In the 2011 federal budget access to LITO was removed for minors on “unearned income” such as trust distributions.

Can pension payments be made into another person’s account?

I have a self-managed super fund in my name that is in pension mode. All withdrawals are being paid into an account in my husband’s name. Is this in order or should payments be into a joint account or one in my name? Also, can one corporate trustee be used for more than one self-managed superannuation fund?

Answer: What you are doing should not be a problem as long as you have documentation to back up what is happening. This documentation should include instructions from you as the member, in relation to the payment of your account-based pension, for it to be paid into the account in your husband's name. It would also be worthwhile if you spoke to the administrator or auditor of your fund just to make sure whether there is anything else you should be doing in relation to the payment of your pension.

How do anti-detriment payments work in a SMSF?

How do you address the situation in an SMSF if it pays an anti-detriment payment and creates a big tax deduction but there are no members to use it, or the beneficiaries are young and unlikely to use the huge deductions in some cases? I am being told if the member’s funds are in some public offer funds or modern wrap accounts that offer superannuation these funds pay the lump sum out without having to set up reserve accounts etc. Is this true and does it mean a SMSF might have a period that it isn't beneficial to a family?

Answer: If the only reason that an SMSF was worth having related to anti-detriment payments I would agree with you that possibly a time could come when an SMSF is not the best solution. The rules relating to anti-detriment payments are extremely complex and I agree with you that it is very hard for an SMSF to use them.

If an SMSF is able to get a benefit from the anti-detriment payment rules, and the fund has younger members that will be continue to contribute to the fund, they would receive the benefit of the carry forward tax loss relating to the anti-detriment payment. This would result in no tax being paid on the contributions. Before taking any action in relation to your SMSF on anti-detriment payments you should seek professional advice.


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

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