We are New Zealand citizens (aged 64 and 62) who have resided in Australia since January 2005. We have been self-employed since our arrival but cannot easily obtain Australian citizenship. So we are contemplating returning to NZ next year to assume residency. Our question relates to our self-managed superannuation fund. It has $580,000 in bank deposits and when the business is sold this figure will grow to $1.2 million. Our advice is that because it is in the small business category we can contribute up to $450,000 each from the sale proceeds. As NZ residents, can we retain our SMSF and the attendant no tax environment once we retire and commence an allocated pension? This would be paid to our Australian bank account. M.T.
A couple of problems emerge. Possibly the most important is the rule regarding SMSFs and tax residency. To receive the standard tax concessions and avoid the 46.5 per cent tax on non-complying funds, SMSFs must be considered a resident, regulated fund at all times during the income year.
To achieve this, the fund has to meet three tests: it must remain established in Australia at that time the central management (the trustees in your case) and control of the fund is in Australia and either it has no active members, or at least half of its assets are attributable to Australian-resident active members. A fund can retain its residency status while the trustees (or directors of a corporate trustee) are temporarily overseas, for up to two years. Short trips of less than 28 days back to Australia cannot re-trigger the two-year period.
Accordingly, you will be effectively unable to maintain your SMSF if you return to full residency in NZ unless you transfer trusteeship to a trusted Australian resident to whom you each grant a specific enduring power of attorney. Thats a big step to take with your life savings.
You could roll the money over into a standard public offer fund and become non-resident in Australia, but that wont let you off the hook in regard to problems with tax in NZ. This is because NZ, like Australia, taxes its permanent residents on their worldwide income, with credits available for tax paid overseas, subject to any tax treaty between the two countries. Foreign super is defined under NZs Foreign Investment Fund rules and is taxable.
NZ has a one-off, four-year tax exemption on foreign superannuation for returning New Zealanders who have not been a tax resident there for 10 years, but this would exclude you. NZ exempts residents and non-residents from tax on benefits from NZ super schemes, and one option is to transfer to the KiwiSaver scheme in NZ under the proposed portability agreement. Under the agreement, not yet law, retirement savings held in Australian complying superannuation funds or New Zealand KiwiSaver accounts may be transferred between the two countries (but not into SMSFs).
By the way, if you qualify for the small business CGT concessions, you can place considerably more than $450,000 each into a super fund. Be sure to have a long chat with a tax accountant with knowledge of the tax systems of both countries.
REDUCING THE CGT
We will sell our investment unit next year. We purchased it in 1991 for $100,000 and expect $330,000 from the sale, for about $280,000 in profit after costs. Can we reduce the capital gains tax? We are aged 60 and 63 and are considering retirement next year. A.J.
To calculate CGT, add 50 per cent of your profit to your assessable incomes: $140,000 split across the two of you will see $70,000 added to each of your assessable incomes that financial year.
A tax deduction will allow you to reduce your overall taxable income. Placing concessional contributions into super will give you each a tax deduction of up to $25,000. If you are self-employed, you can make a personal concessional contribution tick the box confirming you plan to claim a deduction.
You might have a problem if you work as employees, as you can then only make deductible contributions via salary sacrifice. It is an unnecessary rule that simply makes it difficult for people to contribute accurate amounts, which is all the more important in the present climate of a low cap of $25,000 (which includes employer 9 per cent statutory guarantee payments) and the evil excess contributions tax of 46.5 per cent.
If you are planning to retire soon, then estimate your taxable income in retirement and see what savings can be achieved by delaying the sale of the property until after retirement. However, if there are valid reasons to sell, such as you need the money urgently or a motorway is being built through your backyard, then tax considerations should take second place.