Tax with Max: Selling the family home

Navigating capital gains tax, leaving shares to a testamentary trust, creating an account-based pension and more.

Summary: Capital gains tax law allows homeowners to have one principal residence as exempt. A proposal to demolish the family home and build two new homes, selling one and living in the other, could be subject to both capital gains tax and goods and services tax. Proposing to live in one house for a period, sell it and then move into the other may not be enough to avoid tax liabilities.

Key take-out: The tax act contains a general anti-avoidance provision, designed to catch anyone doing something in a bid to reduce their tax.

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

Selling the family home

I am 65 and still working full time, while my wife is not working. We are about to demolish our home of 23 years, subdivide and build two new two storey homes on our existing subdivided block. I read on the ATO website that if we live in one of the homes for three months after completion, then sell it and move into the other house, we are not liable for any capital gains tax. Is this correct?

Answer: Under capital gains tax (CGT) law a person is entitled to have one principal residence as exempt. A proposal of this kind might possibly work except that the ATO could mount an attack under the Part IVA provision of the tax act. This section is the general anti-avoidance section that is meant to catch anybody who is doing something in an effort to reduce their tax.

For Part IVA to apply the dominant purpose of the arrangement or the scheme must be the avoiding of tax. Unfortunately the only reason for this plan is to avoid capital gains tax.

Another option would be to demolish the existing home, build the first townhouse, live in it while the second townhouse is being constructed, and then after that townhouse is completed sell the first townhouse and move into the second townhouse.

Because this plan involves selling one of the townhouses and making a profit from the sale, the vendor could be subject to not only capital gains tax but also the goods and services tax. Both the CGT and GST are complicated areas of income tax law and you should seek professional advice before doing anything.

Leaving shares to a testamentary trust

My brother and I own 80% of the shares in our company. We are both over 75 and retired on a pension from our SMSF. Our wills leave our shares to a testamentary trust to distribute income from the company’s property portfolio to our respective families. The company share value has increased substantially since 1986 and if transferred the shares would attract CGT. Would this be the case if the shares are transferred to a testamentary trust on the death of either of us?

Answer: There should be no capital gains tax payable when the shares owned in company of this kind are transferred to the testamentary trusts. If shares are sold by the testamentary trust there could be capital gains tax payable then, when the gains are distributed to the beneficiaries of the testamentary trust. If the shares were transferred to a trust prior to the owners’ death there could be capital gains tax implications at that point.

You should speak to a lawyer that specialises in capital gains tax and testamentary law as I believe there are number of other things you should consider. These would include who the trustees of the testamentary trusts are going to be and who will become the directors of the private company that is 80% owned by you and your brother.

Leaving assets to a descendant

My parents want to redo their wills. I am 42, not capable of working, and on a total and permanent disability pension paid by my SMSF. It would appear on face value the most effective way for me to receive my parents’ assets on their deaths would be for be for them to be left to my SMSF. Is this allowed and would it be beneficial?

Answer: The only way for assets or money to transfer into a super fund is by way of a contribution. This can be either as a concessional or a non-concessional contribution. This means parents in such a situation will not be able to have a SMSF as a beneficiary of their will with the assets passing directly into it.

Instead, the parents should pass their assets to their descendant upon their death. After this the descendant can either contribute them as an in specie transfer of assets into a super fund, or sell various assets and make cash contributions to the fund.

The concessional and non-concessional contribution caps will apply to both the cash and in specie amounts being contributed to the fund. There also will possibly be capital gains tax implications on the sale of the inherited assets. Before taking any action, after both of your parents have died and you have inherited the assets, you should seek professional advice at that time.

Creating an account-based pension

I turned 65 in July and should qualify for the aged pension. My wife is three years younger with $70,000 in super that she will not access until she is 65 and a half. I have been taking lump sum super payments for living expenses and have around $100,000 left. In addition I should get around $150 per week from my British pension. Will it make any difference putting my super into an allocated pension before the rules change in January 2015?

I am pretty sure if it is in super the deemed income on it will be less than the 5% I have to withdraw if it’s in an allocated pension, and hopefully I will get more aged pension. As I am not on a pension now I don't think starting an allocated pension before January 2015 will make any difference.

Answer: We are not licensed to give personal advice, but here are some general observations. For an investor in a situation like this, starting an account-based pension before January 1, 2015 makes a great deal of sense. This is because before any income is counted from an investor’s superannuation account they are already earning $7,800 a year from their British pension. Any other income earned is added to this to assess eligibility for the age pension.

Under the income test a couple can earn up to $7,384 a year and still receive the full pension. This means on the basis of just an investor’s $7,800 British pension their eligibility for the age pension will decrease by $416 a year. If the investor did not start an account-based pension, or started one after January 1, 2015, they would be deemed to earn income on their current $100,000 superannuation account of $2,306 a year. This would result in a further decrease in their age pension of $1,153 a year.

If the investor started an account-based pension immediately they would be subject to the current income test. Under this test they would have a deductible cost of their pension of $5,394 a year. This is calculated by dividing the $100,000 balance of their super by their life expectancy of 18.54 years. If they withdrew the minimum pension of $5,000 a year, no income would be counted under the income test and they would receive $1,153 a year more in age pension.

I also don’t understand why you think that your wife cannot access her superannuation until she turns 65 and a half. Although there has been some discussion about increasing the retirement age from 65 nothing has become legislation at this point. I suspect the 65 and a half age for your wife actually refers to when she will be eligible for the age pension.


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