Tax with Max: Withholding tax on overseas investments

Withholding tax on overseas investments, moving interstate, and more.

Summary: This article provides answers on paying withholding tax on overseas investments, moving interstate and buying a second home, making non-concessional contributions at age 70, setting up a trust structure as a business contractor, and the tax payable on death benefits made to children.
Key take-out:  Income produced from overseas investments will more than likely attract withholding tax, however any such income has no bearing on the tax status of a SMSF.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Overseas investments and withholding tax

As a retail investor it is hard to find appropriate overseas investments. ETFs look good but I don't want to get involved with withholding taxes. I am over 60; even with the US/Australia tax treaty I am worried I would lose the tax-free status of my SMSF?

Answer: Unfortunately if you want to have overseas investments you will more than likely have to put up with the fact that tax will be withheld from the income produced from those investments. The tax treatment of investments has no bearing on the tax status of a SMSF. The tax-free status of the fund is not determined by the age of the members, but is determined by whether the member’s account is in accumulation phase or pension phase.

Where a member’s account is in accumulation phase tax is payable on all income earned. If this income has had tax deducted from it, such as the withholding taxes you refer to from overseas investments, or it is dividend income with interpretation credits, the tax payable by the fund is reduced by these credits and withholding taxes. If a member’s account is in pension phase no tax is payable.

Tax implications of moving interstate and buying a second residence

I have a contract for interstate work for 12 months, with a possible renewal for another 12 months. Because of the high rental costs interstate, we have decided to purchase a house there and our daughter will live in our current residence rent free. If we return to our current house after the contract expires, we will sell the interstate house. If we remain interstate after the contract expires, we will sell our current house. I understand that we cannot have two residences for tax purposes, so what would be the potential capital gains tax situation under both scenarios?

Answer: An individual or a couple can only have one home that qualifies for the capital gains tax exemption. As you are planning to purchase a house when you move interstate for work, rather than renting one, you will need to nominate one of your properties as your principal place of residence.

Due to the uncertainty of whether you will be permanently moving interstate it would make sense to nominate your current house as your principal residence. This is because it, more than likely, has accumulated a large amount of capital gains tax free increase in value. In addition, if you decide to move permanently interstate you will not suffer greatly, from an income tax point of view, by the new property becoming your residence after one or two years.

Salary sacrificing and making non-concessional contributions at age 70

I am aged 70 and will shortly become employed part-time under a system with mandatory concessional super contributions from salary. Will this circumstance qualify me to implement salary sacrifice and, more importantly, make non-concessional contributions? Am I still subject to the work test for any benefits apart from the compulsory Superannuation Guarantee Levy? Ordinarily I would not accumulate 40 hours in 30 days in my part-time position, but could arrange to do so if that is the requirement for those further entitlements.

Answer: As you are over 65 the work test will apply to you with regard to making personal voluntary super contributions. As long as you are earning more than $450 a month your employer will be required to make compulsory superannuation contributions on your behalf. As salary sacrifice contributions are a voluntary super contribution you would need to be working more than 40 hours in a 30-day period to be able to make them. This also applies to your ability to make non-concessional contributions.

This will mean you will need to organise your work roster so that you will be able to pass this test to maximise your salary sacrifice contributions and your non-concessional contributions. You will need to be careful in relation to your salary sacrifice contributions, depending on what your taxable income will be in the year you plan to make them. There is no point in sacrificing salary as extra super contributions, and paying the 15% contributions tax, if the employment income is not taxable.

Setting up a trust structure as a business contractor

I am considering creating a trust fund structure, where the trust will own a business with a company acting as trustee, for the purpose of asset protection and maximising tax benefits. The need may arise as I am about to buy an investment property. Currently I own a company, of which I am the sole director. The company receives the income from me working as a contractor offering professional services and distributes the income to me. I am trying to understand which one would be the best structure?

Answer: The first thing to establish is whether you are really running a business or effectively being employed through the company structure that you currently own. There are a series of tests that must be passed before a person working as a contractor can be regarded as running a business.

These are:

  • the contractor must be paid to achieve a specific result rather than working for an hourly rate;
  • the contractor must supply all of the tools and equipment necessary for them to achieve the specified result;
  • if the contractor makes a mistake they must be required to fix it in their own time and at their expense;
  • there should be a written formal contract in place setting out all the relevant details of the contract; and
  • the contract must state that the contractor has the ability to delegate or subcontract the work out.

If the main reason you are looking at setting up a trust with a company acting as trustee is for asset protection, you are actually running a business, and you have a family that would enable you to distribute business income to them to obtain a tax advantage, a family trust could be of benefit. If you, however, do not have any family you can distribute income to, setting up a family trust will be of no benefit. You should seek professional advice before taking any action.

Tax payable on death benefits to children

If a person over 60 signs a binding death benefit document to the effect that three children will receive equal shares upon the death of the superannuant, how is tax calculated on the payout?

Answer: In the event of a member dying, where they have a binding death benefit nomination in place, the first thing that must be worked out is the total value of their superannuation benefit at the time of death. Once this is done the superannuation is then paid to the people mentioned in the binding death benefit nomination. In your case, each of your children will each receive one-third of the final value of your superannuation account.

If each of the children are dependants at the time of your death no tax would be payable, but if they are adults and therefore not dependants tax could be payable by them at 16.5%. In some circumstances, where the amount of superannuation paid to non-dependants results in their total income being under the taxable limit, no tax would be payable. If the superannuation received means it is taxable, the rate of tax payable will be 16.5%.


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