Tax with Max: Selling Telstra

Selling Telstra

My SMSF is in pension mode although I have made concessional contributions during the year resulting in about 5% being in accumulation. All sources say sell Telstra in the buyback and buy the shares back after the dust has settled, if you still want to have Telstra shares. You would obviously need to buy them back at a lower price than the price at which you sold them. However, won't there be fewer shares available to buy and wouldn't that lead to an increase in price of Telstra shares?

Answer: Whether the price for Telstra shares will increase after the buyback will be anyone’s guess. Investors who have the majority of their super funds in pension phase (therefore not paying any tax) are highly likely to be better off by participating in the buyback. Scott Francis’s Eureka Report article on August 27, 2014 (Why buybacks are better) goes into great detail about why buybacks are better. Before taking any action on the buyback you should seek professional advice to make sure you will be better off.

Subdividing an existing residence

Our existing home is built on a two acre block and we have council approval to divide the block into two one acre blocks.  The "new" block is estimated to have a selling price of $180,000.  The total cost to create it should be $40,000 in council, government, and other fees.

The property's sale value as it exists now – two acres with improvements – is about $500,000. We purchased it 25 years ago for $135,000 but spent probably $120,000 improving it over the years.  After the subdivision is completed and the "new" block sold, we should get $480,000 for the remaining one acre including the house, etc., should we decide to sell.

Could you please advise what the tax implications are if we sell the "new" block for $180,000 while retaining the "house" block as our residence?  Alternatively, what about selling the whole two acres now with subdivision approval for $550,000, with us having spent $22,000 so far?

Answer: We are not licensed to give personal advice, but here are some general observations. A homeowner whose existing home on two acres, jointly owned, originally cost $135,000, with $120,000 spent on improvements and $22,000 spent on obtaining council approval to subdivide the property, could sell the subdivided block. If this block sold for $180,000, the original purchase cost of $135,000 would need to be apportioned between the land and the building that existed at that time. In addition, the $120,000 of improvements would need to be apportioned between the land and any improvements that were done to the home.

A qualified valuer should be able to come up with what the cost of the land would have been at the time of purchase, if there are any problems in apportioning the original purchase cost. After arriving at the cost of the land, which for the purposes of this exercise I will assume is $40,000, the full cost of subdividing the property would need to be apportioned between the two one acre blocks.

This would result in a cost for capital gains tax purposes of $40,000 for the block that would be sold. Because a new asset has been created through subdividing the property the principal residence exemption would not apply to this block. This would result in a capital gain, on a selling value of $180,000, of $140,000. If the two acres were sold with the permit to subdivide no capital gains tax would be payable as the principal place of residence exemption applies to property of up to two hectares.

For income tax purposes the general 50% exemption would apply resulting in an assessable gain of $70,000. For a property that is jointly owned this would produce an assessable gain of $35,000 each. If the block were then sold along with the home there would be no capital gains tax on any profit made on this as this would still attract the principal place of residence exemption.

There are a number of strategies that could be used to reduce the tax payable. For homeowners aged under 65 and not working, one would be to make a self-employed super contribution up to the maximum allowable limit.

You should seek professional advice so that more accurate calculations can be done as to whether it is better to sell the whole property now, and also to go through other strategies that may be available to you to reduce any tax payable.

Paying more into super

I am a 48-year-old woman with no dependents. On being unexpectedly made redundant last year I took the pension for life option and receive a payment each fortnight of $450. I am about to change roles to a lower paid role on approx $65,000 for a not-for-profit organisation and have the option to salary package my mortgage payments to the maximum of $16,000.  

I also want to pay extra money into super, to build this up in a new fund, and want to choose one which offers income protection insurance as an option.  Do these choices make sense given my circumstances, and what superannuation fund would you recommend?

Answer: We are not licensed to give personal advice, but here are some general observations. For someone aged under 60, a pension of $11,700 a year is fully taxable. This means any other income earned is added on top of this. Choosing to salary package $16,000 a year in mortgage repayments, and also maximising the salary sacrifice amount into extra superannuation of approximately $23,000, would make a great deal of sense from an income tax point of view.

If someone packaged $16,000 as mortgage payments, and was earning $65,000 and paying a corresponding marginal tax rate, they would be approximately $8,600 better off a year from a tax perspective. By this I mean for them to have paid $16,000 in loan repayments, receiving this as a normal taxable salary, they would need to earn approximately $25,000.

Maximising their salary sacrifice superannuation contributions also makes a great deal of sense, as long as there is sufficient cash flow being generated to meet their living expenses. This is because they would be paying 34.5% in tax and Medicare levy if they took this a salary, while the super contribution is only taxed at 15%.

Normally not-for-profit organisations offer other before tax salary packaging options so it would be worthwhile asking if you have any other options. Also you should seek advice from a financial adviser who specialises in strategic tax planning to maximise your tax benefits and what you will be investing for your retirement.

As to superannuation funds, industry funds often have lower management, investment, and insurance costs and provide higher coverage without any medical tests being required, so are worth looking at. I know some of the funds offer a tool on their website that allows you to compare their fund with others. After looking at several superannuation funds, as well as a commercial superannuation fund for the sake of comparison, the comparison tool can be used to compare management costs, investment costs and insurance costs.

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