Weighing up selling, tax and share schemes

Summary: Using real-client examples, we answer your questions surrounding selling a house, shares, and company equities scheme.

Key take-out: Those over age 60 generally can avoid paying capital gains tax on selling shares if they don’t have any other income.

Question: My mum went to the UK from Australia when she was 21 in 1953. She made a life there, married, had children and is still there. However, now in her mid 80s, I would like to bring her home to look after her here in Australia. She still has her parents’ house and I was hoping, if needed, she could sell this and help self-fund her retirement in Australia.

However, on further investigation, it seems you cannot pay into a super fund over 75, except for selling your house and placing approximately $300,000 in. Does this mean that the remaining capital and any interest earned off this capital from the sale of the house would be treated as regular income at the standard rates?

Answer: Unfortunately for your mother, she will not be eligible to make a downsizer contribution of $300,000 despite meeting the age requirement of being 65 or older. This is due to the second main requirement of making a downsizer contribution being that the contribution must be in respect of the proceeds of the sale of a qualifying dwelling in Australia.

As the home that your mother would be selling is in the UK, she could not make a $300,000 super contribution under these rules.

You have not advised what the expected selling value of her parent’s house will be; I will, however, be able to provide some indication of the taxation situation for your mother on the basis of having $800,000 from the sale of the house.

If the funds were invested and achieved an average return of 5 per cent (providing that she will meet the conditions of being an Australian resident for income tax purposes), the first $18,200 she earns will be tax-free. From $18,200 up to $37,000 she will pay 19 per cent, and on the excess she will pay 32.5 per cent income tax.

This means on an income of $40,000, before taking into account the low income and the seniors and pensioners tax offsets, income tax payable would be $4547. From this, she would be deducted $400 of low income tax offset and a seniors and pensioners tax offset of $1265, making a net tax payable of $2882.

The actual amount of tax payable by your Mother would be decreased if some of her investments included either direct shares or managed funds that have a high level of franking credits, or she invested in some unlisted direct property trusts that had a relatively high percentage of tax-deferred income.

Question: I am 62-years-old, semi-retired with an adequate pension from industry funds and about $40,000 in blue chips which I started buying in 2009 until 2012 in small lots of about $2000 to educate myself about shares. I wish to simplify my life and am considering selling all my shares. While some shares have done really well (WES, WBC, CBA) others have plunged (BHP, WPL, NCM). What should I consider before selling?

Answer: If the pensions you are receiving from the industry funds are all from taxed sources, since you’re over 60, they would be tax-free. If you do not have any other income other than the dividends and franking credits, if you sold the shares in July 2018 before receiving any dividends you would not be paying tax on any capital gains made.

On a total shareholding of $40,000, with no other income other than the dividends you received in the 2018 year, and the fact that you would be eligible for the 50 per cent general CGT discount, it is highly unlikely you would be paying any tax if you sold the shares before June 30. This is because you would not be paying tax, after considering the low-income tax offset, unless of course, the income and taxable gains exceeded $20,542.

Question: I’ve recently retired from full-time work and have an adequate pension. I now have interesting part-time work as the company secretary for a small start-up technology company that has yet to generate any income. Along with other staff of the company, I’m compensated by being awarded share entitlements according to my hours worked. The company board makes an annual determination of the nominal value of the share entitlements, taking into account the company’s improving prospects and the number of entitlements issued.

When the company becomes profitable the intention is to make an annual distribution of part of each entitlement’s nominal value. My question is ‘at what stage is this form of compensation reportable to the ATO and would any cash distribution be treated as salary or as a capital gain?’

Most of the staff have independent income through ‘day jobs’ or like me via a pension and work only part-time for the company in the hope/expectation that their share entitlements will eventually acquire sufficient value to make their efforts worthwhile.

One young man, with unique and critical software skills, works most of his time for the company. His limited income from other part-time work is insufficient to support his family. So to supplement his income last month I purchased some of his share entitlements at their then-current nominal value. I assume that the tax treatment of his income from this sale would be the same as if the income came from distribution of company profits.

Answer: What you are describing could possibly meet the definition of an employee share scheme. The ATO defines an employee share scheme as one that gives employees the benefit of shares in a company they work for at a discount price, or the opportunity to buy shares in the company in the future.

In some circumstances employee share schemes receive special tax treatment depending on whether they meet the eligibility conditions. As the shares in this new startup company are being issued to the employees at effectively no value, except for the one calculated by the company, they would definitely be regarded as being issued at a discount.

There is the chance that the employees of the company may have been eligible for special tax treatment that now exists for startup companies. The concession, rather than regarding the discount provided as ordinary income, allows for any gain made on the disposal of the shares to be counted as a capital gain and receives the 50 per cent general discount.

To be eligible for this treatment a startup company cannot be listed on the stock exchange, all companies in the corporate group must have been incorporated for less than 10-years, and the aggregated turnover of the group must not exceed $50 million. Amongst other conditions the shares issued must be at a discount of no greater than 15 per cent of the market value.

The shares are not being issued at a discount of 100 per cent and, because they are effectively issued at no cost, this means they would not qualify as an employee share scheme, nor for the startup company concessions. This could mean any value received when the shares are sold at some point in the future may be regarded as employment income.

Given the complexities of this area of income tax law, you should seek advice from a lawyer that specialises in this area of income tax law.