|Summary: This article provides answers on transferring property to a SMSF, paying tax in Australia on overseas income, accessing franked dividends in retirement, superannuation distributions on death, super strategies before retirement, and the 45-day rule and franking credits.|
|Key take-out: Superannuation legislation does not permit a super fund to buy a property from a member. However, a super fund is entitled to transfer a property to a member after their retirement.|
|Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.|
Transferring property to a SMSF
In a recent question you advised that a residential property could be owned by a self-managed super fund and could be transferred at age 60 to the member. I am turning 60 in seven months and have a rental property that I fully own and want to transfer this into my SMSF. Can I do it?
Answer: Under the superannuation regulations an SMSF is banned from buying investments from members unless they are listed investments, such as shares, or business real property. Included in this ban is residential property owned by a member. This unfortunately means you cannot transfer the residential rental property into your SMSF.
The point of my answer to the previous question was that an SMSF could own a residential property that could be, upon the retirement of a member, transferred to the member under certain circumstances and if various requirements were met.
Paying tax in Australia on overseas income
I note in answer to a recent question you advised that a non-resident is taxed only on Australian income. I was involved with doing my son’s tax return when he worked in England a few years ago and although his overseas income was said to not be taxed in Australia, it was added to his income to determine his tax rate. The result of this was that he had no tax-free threshold applied to his Australian income and his tax bracket was increased significantly. Is this still the case?
Answer: From what you have described your son must have been overseas several years ago before the taxing of foreign salaries and wages income changed. At those times salaries and wages income taxed in the country where they were earned was not taxable in Australia. The value of these non-taxable earnings was added to other Australian income. This could result in the situation that the Australian income was taxed at a higher rate.
Under the current system salaries and wages earned overseas are added to other Australian income, for Australian taxation residents, and tax is paid on the total income with a credit being allowed for tax paid in the foreign country.
Where someone is leaving Australia to take up a long-term overseas position, and selling their home in Australia and effectively moving indefinitely overseas, a case can be made for them not being an Australian taxation resident. In this situation no tax is payable in Australia on the salaries and wages earned overseas. Australian income tax is only payable on income earned in Australia.
Accessing franked dividends in retirement
Franked dividends may offer income tax benefits for many individuals. But if one is retired and under the current tax free threshold, how does one access the franked dividends?
Answer: To be able to access franking credits you must lodge a tax return. This could be done by you preparing your own tax return and lodging it or having it lodged by a tax agent. If you are not going lodge the tax return yourself you will need to assess whether the franking credit tax refund will exceed the tax agent’s fee.
Superannuation distributions on death
My husband and I are trustees in our SMSF. If we both died accidentally, can our shares be cashed out and distributed to our children as per our wills tax free, or do we need to have one of our children in the SMSF.
Answer: In the event of your husband and you dying at the same time your personal legal representatives, more than likely your executors, would take over the role of trustees of your SMSF. If you do not have binding death benefit nominations in place, that specify the proceeds of your superannuation fund are to be paid directly to your children, your superannuation would more than likely be paid into your estate and dealt with according to your wills.
If your superannuation is made up of tax-free benefits there would be no tax paid on the money inherited by your children, no matter what their age is. If your superannuation is made up of taxable benefits, tax will be payable by your children if they are no longer dependents. You should seek advice from a superannuation and estate planning specialist who can review your current situation and make appropriate recommendations.
Super strategies before retirement
My husband is due to retire in four years at 58. He has good super as he has been with the same multi-national company for 29 years. Recently it was suggested to us to start a SMSF when he retires. We also have three investment properties in Queensland. We have looked previously at selling one but the market was not so good.
When the market picks up on the Gold Coast we will sell it, which will give us some cash to set up an SMSF as it has been suggested we need a minimum of $200,000 to set up a fund. I have always worked part-time, so I have very minimal super of $55,000. My husband is due to receive around $880,000 when he retires. I am 55 and my husband is 54, and we own our own home valued at $1.6 million in Sydney. The rental properties are valued at $365,000, $600,000, and the one on the Gold Coast at $285,000.
Is a SMSF a good idea or should we do as we were planning to do and pay out our loans on the rental properties and be positively geared. My husband would also like to downsize at retirement and move to a country property.
Answer: The $200,000 amount that is often quoted as being a minimum needed to have an SMSF would more than easily be met if your husband rolled some or all of his superannuation into an SMSF.
Given that your husband is planning to retire in four years, that you have a number of investment properties, and your husband would like to downsize and moved to the country, you should seek advice from a financial planner that specialises in strategic tax advice.
There are number of strategies that you could be considering such as superannuation splitting, the timing of selling of your investment properties, and using self-employed super contributions to reduce tax payable on capital gains. A fee-based strategic advisor should be able to take you through all of these options.
The 45-day rule and franking credits
It appears that holding shares that pay franked dividends for longer than 45 days, even if this goes over two tax years, still warrants a refund of those franking credits. The ATO would have to ask for a refund of those franking credits in the second tax year if the shares were sold in under 45 days as the ATO would not know until the second year when the shares were actually sold, and this would be after refunding the franking credits in the first year. Or does refunding of franking credits and holding of shares for 45 days both have to take place in the one tax year?
Answer: For a shareholder to claim a tax benefit from imputation credits received with fully franked dividends the shares must be owned for at least 45 days. There is, however, a small shareholder exemption for taxpayers that have total franking credits below $5,000.
The 45-day holding period is not affected by different financial years; it is simply that the shares must be owned for a continuous 45-day period. This means in your example of a share being held for 45-days, where this period spans two financial years, the 45-day rule is not breached and therefore the shareholder can still claim the franking credits.
Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.
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 email@example.com