Tax with Max: Travelling on a Commonwealth Seniors Health Card

Travelling on a Commonwealth Seniors Health Card

We have Commonwealth Seniors Health Cards that are covered by the grandfathering rules for allocated pensions. Under the grandfathering clause is our travel also restricted to six weeks rather than the new 19 weeks?  I have had a letter from Centrelink stating the card will be cancelled if we spend more than six weeks overseas. I thought the rules had changed. Is the letter correct?

Answer: I believe that the letter that you received from Centrelink would have been dated prior to December 31, 2014. Because the change to temporary absences from Australia did not become law until January 1, 2015 the letter was strictly correct.

However under the changes that were introduced from January 1, which included the way account-based pensions are treated for eligibility for a CSHC, the limit of being absent from Australia for no more than six weeks was changed to a period of 19 weeks.

This means any person holding a CSHC at December 31, 2014 will continue to have their account-based pension exempted from the income test for the card, and anyone holding a CSHC will remain eligible for the card as long as they are not absent from Australia for more than 19 weeks.

Buying an ETF as a non-resident

I am Australian citizen but am a non-resident of Australia for taxation purposes as I have been living in Asia for the past 10 years. I have had no sources of income within Australia. I am contemplating buying iShares in a global healthcare index fund (ETF) trading on the ASX and would like to better understand the following:

1. Would I be subject to any capital gains tax while a non-resident of Australia?
2. Would I be subject to taxation on any future distributed dividends, and if so at what rate, and is this the same for dividend payments reinvested?
3. If I was to become a tax resident of Australia again while holding the shares would CGT be applicable and calculated from the date of new residency at which time this same date would become the purchase price of my future capital gains calculations?

Answer: Non-tax residents of Australia are subject to capital gains tax on assets connected with Australia. The most obvious asset to be subject to capital gains tax for non-residents is land and buildings situated in Australia.

When it comes to shares in a public company or a unit trust the foreign resident must own at least 10% of the value of the shares in a company or the units of any unit trust, during the five years before the capital gains tax event occurred, for a capital gain to be assessable for Australian income tax.

Unless someone is planning on buying 10% or more of the listed global healthcare index fund they should not be subject to capital gains tax on this holding.

If the global healthcare index fund pays its distribution as franked dividends there is no income tax or withholding tax payable by an investor who is a non-tax resident. If the distributions such an investor receives, whether they are reinvested or paid out as a cash dividend, are effectively a non-franked dividend, they could possibly be subject to 30% withholding tax. Withholding tax may not be applicable to the dividends received from the index fund if the country that the investor is resident in has a double tax agreement with Australia.

You are correct in relation to the capital gains tax effect of you becoming an Australian tax resident. If you become a tax resident you will be taken to have acquired certain assets at their market value at the date you resume your tax residency.

Capital gains tax and tax residency is a complicated area of income tax law. You should seek professional advice from a professional who understands the workings of the tax relationship between the country where you live and Australia.

Working out CGT on the sale of a business

My partner is looking at selling his business and is wondering if there are any ways to avoid paying the full 30% in capital gains tax.  He is 50 so he doesn't meet the 55 retirement age and has owned the business for approximately 12 years. I would like more information about active asset reduction or anything else that you would recommend to reduce the payment to the ATO.

Answer: From your question it would appear that your partner owns a company that carries on the business. To be eligible for any capital gains tax relief when that business is sold it will need to be classed as a small business entity, or your partner must have less than $6 million in net assets.

For a business to qualify as a small business entity it must have less than $2 million in turnover in the previous income year. If this test is not passed your partner and any entities connected with him must have a maximum net asset value of less than $6 million.

Not all assets are included in the $6 million limit. Those excluded include a person's home, amounts held in superannuation, and personal use assets such as property which has not been used to produce income.

Once a business qualifies for the small business capital gains tax exemptions, and the business is owned through a company, the shareholder owner must hold at least 20% of the income and capital shares issued by the company.

One of the major concessions available to qualifying small business owners is the 15 year exemption. Unfortunately your partner will not qualify for the exemption as he has not owned the business for 15 years or more, he is not 55 or over, and is not retiring permanently.

One exemption that he may be eligible for is the 50% active asset discount. Under this exemption when an eligible individual or business makes a capital gain on an active asset, which is an asset that is used in conducting the business such as business premises, no tax is payable on 50% of the gain made.

If the company that your partner owns sells an active asset it can claim the active asset discount and not pay company tax of 30% on the discount. This unfortunately would not provide a benefit for your partner. This is because when this discounted profit is paid to him it would be classed as an unfranked dividend, and tax would be paid at that time at his applicable marginal tax rate. Your partner could choose not to claim the 50% active asset discount in the company when the business is sold.

If instead of the business selling the active asset your partner sold his shares in the company, and 80% or more of the value of the shares in the company is made up of active assets, the shares would be classed as an active asset and he would receive the 50% discount.

The next capital gains tax exemption that can be claimed is the retirement exemption. Under this exemption no capital gains tax is payable up to a gain of $500,000, which is a life time limit for an individual. In your partner's case as he is under 55 the amount claimed under the retirement exemption would need to be contributed to a superannuation fund.

There is also a small business roll over CGT benefit that effectively postpones tax payable on an eligible gain made.

The small business CGT exemptions are a complicated area of taxation law and your partner should seek professional advice before taking any action.

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