Summary: Someone who is subdividing a family home built on a large block may wish to sell one block in a tax-efficient way. The block that includes the current family home will not have tax payable on the increase in its value. But the block a parent plans to sell to their child will be subject to capital gains tax.
Key take-out: A property owner wishing to reduce the tax payable on the block transferred to their child could make a tax-deductible self-employed super contribution.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.
Subdividing the family home
After building the family home 15 years ago on a large block I recently rezoned it and now have a subdivision for four homes including the family home. I would like to give or sell one block to my son and build a new house for myself on the remaining two blocks. Would this be regarded as tax avoidance? I am a 65-year-old wanting to downsize a little bit! What would be the most tax-efficient way of selling the subdivision?
Answer: A plan such as this would not be regarded as tax avoidance, as unfortunately no tax will be avoided on the block transferred as a gift. The block that includes the current family home will not have tax payable on the increase in its value due to the main residence exemption. The CGT exemption will only apply to two hectares. If the block is larger, CGT will be payable on the excess land.
In a situation like this, the two blocks the parent will be building their new home on will also be exempt from capital gains tax as this will be their new main residence and will also qualify for the exemption. The two-hectare limit will also apply.
The block the parent is planning to either sell or give to their son will be subject to capital gains tax. The first thing to do is to work out the total cost of this block. The costs to include will be its share of the original purchase cost and the subdivision costs. It will then be necessary to get a valuation to establish its fair market value.
The fair market value will be the selling value used to transfer the property to your son. There will also be stamp duty payable on this value. The amount that the market value exceeds the cost will be the profit made. As you have owned the land for more than 12 months, despite it recently having been subdivided, the taxable gain will be half of the profit made on that block.
Someone who wished to reduce the income tax payable on the block transferred to their son could make a tax-deductible self-employed super contribution. To do this, it would be necessary to pass the work test in the year that the contribution was made.
This deductible contribution will be subject to the superannuation contribution limits and the rules relating to making a tax-deductible self-employed super contribution. To be eligible to make the tax-deductible self-employed super contribution the amount you receive for working must be less than 10% of your assessable income in the year you make the contribution.
There are a number of other strategies that you could use to reduce the tax you pay. You should seek professional advice before taking any action.
Qualifying for the Seniors Health Card
Account-based pensions that commenced before January 2015 will be exempt from the new pension deeming provisions, making it easier to qualify for the Commonwealth Seniors Health Card. What concerns me is whether the grandfathering provision of the pension will be negated in the following circumstances:
1. The fund paying the pension is subsequently rolled over to another fund, for example from an SMSF to an industry fund or from one industry fund to another
2. The structure and name of an SMSF is changed from having members of the fund as trustees to having a company trustee
3. The Seniors Health Card is temporarily cancelled, say because of a period overseas in excess of 19 weeks.
Answer: In the first scenario the account-based pension would need to be commuted/ceased, the superannuation account rolled back into accumulation phase, and then the funds rolled into the new super fund. As a result of this process a new account-based pension would be commenced and the grandfathering provisions relating to the CSHC would be lost.
The changing of the trustee of a self-managed super fund, from individuals acting as trustees to a company, has no effect on the account-based pension being paid. If someone changed the trustee of their SMSF the original account-based pension would continue and therefore the grandfathering provisions should still apply.
As far as I know the new legislation has not been passed with regard to the tightening of the income test for eligibility of the CSHC. As a result of this I cannot provide an answer to your third scenario. This is because until the legislation has been passed no-one will actually know how the grandfathering provisions will work. My guess would be that the grandfathering provisions would be lost.
Retiring in an investment property
Could you clarify some of the consequences of retiring into my investment property? I assume that once it is my primary residence capital gains tax liability stops at that date. How is that formalised? Do I need to do a current valuation to establish the value as at the date I move there? Are there other consequences or formalities I should think about?
Answer: When a property has been used to produce income, whether it is a rental property or a home classed as a place of business, capital gains tax will be payable when it is eventually sold.
Someone in this situation would need to have their rental property valued at the time they move in to assess what the increase in value has been since purchasing it as an investment. The cost of the property will be the original purchase cost, the purchase costs including stamp duty and legal fees, plus any amounts spent during the time it was rented that were not tax deductible.
When eventually selling the property, after it having been the owner’s main residence, capital gains tax will be payable at that time on the increase in the value while it was a rental property. If the owner has been claiming the 2.5% building write-off as a tax deduction, and the property was purchased after May 1997, the amount claimed must be added to the capital gain made and tax will be payable on this increased amount.
Working out a financial separation
I have a question about a situation where one trustee of a corporate SMSF, who is 64, holds more in the fund than the other person, and can contribute three years in advance before their 65th birthday. The other person is 65 and can no longer contribute. Upon a financial separation, is the older person is able to benefit from that contribution if the super fund is split 50/50?
Answer: One of the few times there can be a change in the beneficial ownership of a member’s superannuation is in the event of divorce. Since the changes were made to how superannuation is treated in a divorce it is regarded as an asset that can be split and allocated as part of a property settlement.
In this situation it does not matter what amount is shown as belonging to one member of the fund. The value of both members’ accounts is counted as a joint marital asset. As a part of the divorce settlement the ownership of superannuation can effectively change. For this to happen a superannuation splitting order must be issued by the Family Court.
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.
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