Important May Tax Updates

Welcome to the May 2011 Newsletter. In this newsletter we will discuss:

Borrowing in a SMSF

Looking after your and your spouse’s assets

Protecting your investments in your SMSF

Borrowing in a SMSF

There has been widespread media coverage about SMSFs borrowing money to acquire property or shares. There are many organisations with vested interests in promoting loans in SMSFs and we provide information on loans within SMSFs.
If your SMSF borrows money then the loan must meet the following conditions:

(a) The loan is for the purchase of one asset on one title, this does not include expenses to develop the property;
(b) The asset is held on trust so that your SMSF acquires a beneficial interest in the property and your SMSF acquires legal ownership after repayment of the loan; and
(c) If an SMSF defaults on the loan then the lender can only sell the asset that was bought with the loan, the other assets in the SMSF are protected.

You must remember that having a rental loss in a SMSF is not tax advantageous because a SMSF’s tax rate is 15%. The tax advantages on a rental loss are for you personally because you would generally have a tax rate which is higher than this so a rental loss under your name may provide you a cash benefit of 46.5% rather than 15% in your SMSF.

Furthermore, your SMSF account balance does not increase if you are losing money on a rental property. This means that when you wish to withdraw money as a Pension once you are over 55 your account balance has been reduced due to the rental losses. You will also have cash flow constraints if you are servicing the loan which minimises your ability for Pension withdrawals once you are over 55.

Another important point is that for a loan in a SMSF if you plan to use the loan to buy shares the loan can only be to buy shares in one company with the same rights attached to them. You must also sell all the shares at the same time. In relation to a property purchase the loan must be for a property on one single title. This means you cannot use one loan to purchase two different units and this will cause problems if you plan to purchase a property that has parking on a separate title.

Looking after your and your spouse’s assets

You may be wondering the tax implications upon death and how to minimize any tax liabilities for your family. You may also want to ensure that your family receives a fair distribution of your or spouses assets so that legal battles can be avoided. The information below will help you on making informed decisions and give you some ideas about your estate planning. Please note that the information below relates to assets held outside of super as the estate planning considerations are separate to this.

In relation to the main residence of a deceased person it may be possible to avoid Capital Gains Tax (CGT) for a beneficiary of the property by having a person entitled to live in the property under the will continue to live in the property so that it becomes their main residence and any CGT may be avoided when its sold by them.

If you have a spouse it may be better that they own the property to maximize your asset protection if you are running a business. Should the spouse pass away it is possible that the Estate owns the property upon their death and you have a right to live in the property, this maximises your asset protection and the property retains its tax-free status if you live in it as your home.

If nobody can live in the property then the property may be sold within 2 years of the deceased persons death and avoid any CGT liability. The property may also be rented out for those 2 years and there will be no CGT upon sale. The 2 year rule also applies to an Estate. However, if its sold after 2 years then for CGT purposes the cost base is the market value on the date of death (assuming the property was not rented out if it was bought post September 1985), this may provide opportunities to minimize any tax upon sale of the property.

In relation to your other assets the estate planning issues are discussed below:

• If the asset was purchased by the deceased before 20 September 1985 the cost base of the asset inherited is the market value at time of death.

• For assets acquired after that date the cost base is its original cost. Any capital gain is calculated by the amount received on sale less the cost base

• If you have business goodwill or a property used as part of your business and you were able to access the small business CGT concessions just before your death, your beneficiaries may also be able to access it if they sell it within 2 years of your death.

Please speak to us so that we can provide to you various tax scenarios on your assets so that you are aware of the true value of assets (less any possible tax costs).This may potentially avoid any unnecessary legal battles in your estate.

How can I protect my investments in my SMSF?

One of the major benefits of having your own super fund is that you can ensure what assets are owned by your super fund and make informed decisions of where your assets should be allocated. This ensures that the assets of the super fund are protected from being abused by other parties and protects you and your dependents wealth.

The super fund rules require that all assets are properly registered in the super fund’s name. The reason for this is so that your super funds assets are protected in case you or your related business entities become insolvent.

If you hire a financial adviser to assist you with asset allocation in your SMSF it is extremely important for you that all assets purchased in the SMSF are properly registered in your SMSF’s name. In this way you will always know exactly where your super fund money is invested and can easily find out how the assets are performing.

The proper way of registering your super fund’s assets are:

(The name of the trustees or trustee company) AS TRUSTEE FOR (The name of your super fund)

The way to ensure that your super fund’s assets are registered properly are by:

• Reviewing all purchase documents
• Visiting company websites, inputting your shareholder number in the shareholder/investor section to confirm shareholding balances for your super fund
• Visiting land title websites for the state in which your property is owned by your super fund. Please note that the trustee is only registered as the owner.
• Visiting bank statements online to review where your cash is being spent

There are different ways that you can confirm ownership of your super fund’s assets. With the internet it is easier to confirm where your super fund’s assets are being invested and in this way you can protect your super fund assets and ensure no one is misusing your valuable assets. Please contact us to discuss your specific situation.

We hope you have enjoyed this article please contact us if you have any questions

Disclaimer - The material contained in this newsletter does not constitute advice. DPL is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation. .