Tax with Max: Renting out the family home

Renting out the family home, transferring SMSF balances, and more.

Summary: This article provides answers on capital gains tax if renting out the family home, transferring balances between SMSF accounts, the Gillard government’s proposed new super tax, account-based and reversionary pensions, payments from a testamentary trust to a super fund, tax refunds of dividend franking credits, and using capital losses in pension mode.
Key take-out: Under the capital gains tax rules a person’s home can be rented, while they are not living in it, for up to six years as long as they do not have another home.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Is capital gains tax payable if the family home is rented out?

Since 2007 when my husband died I am the sole owner of the family home on the Gold Coast

My children live in Austria and I decided to spend more time in Austria. I had the opportunity in January 2013 to rent out the property for 12 months. This suited me as I have to budget for big repairs on the house.

The tenants approached me recently whether they could extend the lease for another 12 months. I want to avoid my property being classed as an investment property when I want to sell. For how long can I rent the property before it becomes classified as an investment property?

Answer: Under the capital gains tax rules relating to a person’s home a property can be rented, while you are not living in it, for up to six years as long as you don’t have another home. This means if you have rented the property since January 2013 you could potentially rent the property until January 2019, and still have it classified as your residence, and retain its exemption from capital gains tax.

Transferring a member’s balance between accounts within a SMSF

Advice has been received from an investment advisor to transfer an amount of commuted pension balance between accounts in an SMSF. That is, one member’s balance is to be transferred to another, by book or journal entry, rather than by commutation and then cheques being written. The reason apparently revolves around Centrelink entitlements. Is it permitted to do such a book entry, supported by member letters and trustee minutes?

Answer: The only time that a member’s balance in a super fund can be transferred within a super fund to another member is upon their death. This would occur when the deceased member was receiving a reversionary pension, and upon their death the pension reverted to the other member in the fund, or when a deceased's benefit is paid in the form of a pension to a dependant.

This being the case the only way you can decrease one member’s account and increase another’s is for there to be a payout from the super fund. This would entail one member taking a lump sum payout which is then contributed by the other member back into the super fund either as a concessional or non-concessional contribution. The ability for this to happen depends on the member’s age and whether they meet the work test if they are 65 or over.

Clarifying the Gillard government’s proposed new super tax

This may indicate a very poor understanding of all the things that have been said about the possible new tax on super pension income, but I find the wording of most articles imprecise.

If the new tax is implemented, will it apply to the income generated by the fund if that is greater $100,000, or will it apply to the amount of pension taken out of the fund?

Answer: The policy to tax superannuation funds in pension phase was a part of the superannuation announcement in April 2013 by the Gillard government. Thankfully this policy never became legislation and, under Tony Abbott's promise that there would be no surprise adverse changes to superannuation if he got elected, it is unlikely to be happening in the near future.

Under the legislation proposed by the Gillard government a member's pension account that earned more than $100,000 in income would be taxed at 15% on the excess income. In other words if your superannuation fund credited $110,000 in income to your pension account in one year, tax would be paid of $1,500 on the pension income over $100,000.

Establishing account-based pensions with reversionary beneficiary characteristics

My wife and I both have SMSF account-based pensions that were formerly allocated pensions. When established, the allocated pensions had reversionary beneficiaries nominated (each to the other). These allocated pensions automatically became account-based pensions. I have assumed that the reversionary benefit nominations would automatically follow to the new pension arrangement. Now I’m not so sure.

Are there two types of account-based pension, one of which is a reversionary and the other is not? What action might I need to take to ensure the original reversionary beneficiary arrangement remains valid?

Answer: Yes, there are two types of account-based pensions, one of which is reversionary. You could not assume that the reversionary allocated pension, that has now become an account-based pension, will automatically have retained the reversionary pension characteristics.

Your first step should be to check with the accountant and/or auditor for the fund to get their opinion. If it is not classed as a reversionary pension you can alter this pension without commuting it so that it can become a reversionary pension.

Making payments from a testamentary trust to a super fund

I am 61 and my wife is 60. We both have superannuation funds that are in allocated pension mode and from which we draw down the minimum pensions. In addition, we have a testamentary trust (I am the trustee) from which we make payments to both mine and my wife’s superannuation fund. Could you please confirm that the payments from the testamentary trust to our super funds can be made on a concessional basis?

Answer: I am confused how you could have a testamentary trust unless this has come as result of someone dying. You are possibly referring to a family discretionary trust with you being the trustee. There are only a few ways that I know of that your trust could be making payments to your superannuation fund.

The first would be if your family trust is renting business premises from the superannuation fund. The others would be if it is making tax-deductible self-employed super contributions on your behalf, your trust employs you and is making employer sponsored contributions, or the money transferred to the trust is classed as a non-concessional contribution.

If you are not employed by your trust the ability for it to make concessional self-employed super contributions on your behalf would depend on whether you meet the criteria for making these types of contributions .Your family trust cannot make payments to the super fund in the form of distributions of income as these would be classed as non-arms length income and taxed at the highest tax rate.

Tax refunds of dividend franking credits

Thank you for the information on tax refunds of dividend franking credits. There seems to be many interpretations since the new government took office. Does this apply to our tax returns for this coming year?

Answer: As far as I know there has not been any proposed changes by the new government to the ability of individuals to claim franking credits included in dividends received on a tax return that result in a tax refund.

Using capital losses in pension mode

I have an SMSF that is in pension mode. I have read that capital gains and losses are ignored whilst in pension mode. I have sold shares purchased prior to the GFC and have incurred a capital loss. Is there a way to utilise these losses by commuting the pension? What happens if I go back to pension mode the next year and have a capital gain?

Answer: If the capital gain is made in the super fund in pension phase, no tax is payable and it is not carried forward. If a capital loss is made in a super fund in pension phase the capital loss is carried forward to a later year when it is offset against a future capital gain. If you intend to keep your super fund in pension phase, and therefore always receive the benefits of it not pay tax, losing the tax benefit of a capital loss should not be a problem.


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

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