June 2010 Tax Update

Welcome to the June 2010 tax update, in this issue we will discuss some tax topics that will be invaluable to meet your personal needs, in this issue we will discuss:

• Minimising your Capital Gains Tax liability
  
• Can my SMSF provide loans or financial assistance to members or relatives?
  
• Maximising the value of your SMSF by transferring a property into it
  
• New trust rules
  
• 2010 PAYG Payment Summary Change
  

Minimising your Capital Gains Tax liability

As you may be aware there is no Capital Gains Tax (CGT) on the sale of your main residence. There are special rules if you have a spouse (including a de-facto or a same sex relationship) because a couple can only claim one main residence for the same period. The important thing to remember is that if you plan to become married or be involved in a de-facto relationship then you and your Partner can only choose one property to be your main residence for the entire period.
The summary of the rules are:

• If you move out of your home to move in with your Partner then your CGT liability is based upon the market value of the property on the day that you moved out.
• It is possible for you and your Partner to choose which property will have the main residence exemption, even if one person does not own any share in the other property. Therefore, you and your Partner can choose to determine which property is sitting on the largest capital gain and which is preferable to have the main residence before you make your decision on which property to live in. We can assist you with this calculation.
• If you and your Partner have 2 separate main residences then you can choose one of the properties to be your main residence.
• If you choose 2 different homes during your relationship and your ownership in the property is more than 50% then you can utilize the main residence exemption for half the period. Otherwise, you will be able to get the full main residence exemption for the entire period.

Before you decide to move into someone’s home and you currently own your home that is your main residence you should speak to us as we need to explain to you the tax implications on this. There may also be land tax implications once you move out of your home and rent it out.

Can my SMSF provide loans or financial assistance to members or relatives?

Your SMSF is prohibited from lending money of the fund or giving any other financial assistance using the resources of the fund to a member or their relative. If your fund does lend money or give financial assistance then your SMSF’s assets can be taxed at 45%. We want to avoid this as your SMSF is an important part of your asset base and it must be protected. An example of this type of breach would be if your SMSF allows a member or a member’s relative to use its assets at no cost or uses its assets as a guarantee to secure a personal loan for the member, this would breach the law.

Giving financial assistance to a member or a relative of a member of the fund is not just for transactions directly between your SMSF and a member or a relative and can cover arrangements where the fund’s resources are used to give financial assistance to a member or a relative through a third party or an interposed entity. An example will be if your SMSF lends money to a friend and then the friend lends the money to you, this may breach the law.

Another possible way of breaching this law is by:

• Providing security or a charge over fund assets or giving a guarantee for the benefit of a member or a relative of a member;
   
• Purchasing an asset from a member or relative of a member for greater than its market value; or
   
• Selling an asset to a member or relative of a member for less than its market value.

In the examples above your SMSF is providing a benefit to its members which is similar to a loan. It is important that in any transfer of assets from between your SMSF and yourself that independent valuers are used to ensure the assets are transferred at market value and to avoid any tax implications.

One of the most important things to remember when you have your own SMSF is that your SMSF does not loan any money to you or your relatives in order to avoid any significant penalties. If you do require the money it can be drawn out in certain circumstances such as a serious health conditions or financial hardship but you must speak to us beforehand if you require withdrawing money from your SMSF and you are under 55.

Maximising the value of your SMSF by transferring a property into it

Your SMSF is generally able to purchase any property from an unrelated third party, this includes residential property. There are special rules in relation to an SMSF purchasing property from its members or the related party of its members. The benefits of the property being transferred into your SMSF are:

• The investment earnings from the property will be taxed in a virtually tax-free environment
• The property can be transferred into your SMSF tax-free if you are able to utilise the small business concessions (we can assist you with this)
• The property can be later transferred to your estate in a more tax-effective manner which may benefit your family
• The NSW State Government has recently announced in the Budget that it may be possible to transfer the property into your SMSF without any stamp duty
• For land tax purposes your SMSF is a separate entity to you. Therefore, the property will be entitled to a separate land tax threshold in your SMSF to you personally so it makes it cheaper to hold in your SMSF.
• The property in your SMSF may provide enhanced asset protection

Your SMSF can only purchase business real property from you or any entity related to you. A business real property is generally a commercial property. However, it can include a block of units that you manage personally and do not use an agent. The main problem arises when a commercial property includes a residential component. When you plan to transfer a commercial property into your super fund and there is a component of the property that is used for residential purposes then your SMSF is not able to acquire it from you.

The residential component can be incidental to the relevant business. An example will be a manager’s residence as part of a motel. In this type of situation the property can be transferred to your super fund. However, if the property is 2 floors with the bottom being a commercial property and on the top floor there is someone living on the top floor then in this scenario the property cannot be transferred into your SMSF.

To qualify as business real property, the underlying land must be “used wholly and exclusively in one or more businesses”. The business or businesses need not be carried on by your SMSF or by a related entity. Where the property is used wholly and exclusively for business by the lessee, the land may also be business real property of the lessor. An example will be if you own a commercial property that is leased to a business, this property may be transferred into your SMSF.

The property that is being transferred does not have to have been built for commercial purposes. It may be possible to transfer a property that was built for residential purposes to your SMSF if it is used for business purposes such as a medical practice operating from a property built as a home. However, if a person lives in it then the property and it is not incidental to the business then the property cannot be transferred into your SMSF.

You must be aware that if the rules discussed above are not followed then your SMSF may be liable for 45% tax on the value of its assets for being non-complying.

Transferring a business real property to your SMSF can provide significant tax savings to you and your family. However, there are some important planning points to review before the property is transferred. If you have a property that may be transferred into your SMSF please contact us so we can devise an appropriate strategy for you.

New trust rules

You may have seen in the general press that the ATO has recently changed its view on the tax implications of trusts distributing income to companies. This method is effective to ensure that you and your family do not pay more than 30% tax on the income derived by the family group.

The new ATO ruling basically states that if the accounting records show that income is being distributed to the company then from 16 December 2009 the cash must be physically transferred to the company by the lodgment date of the trust’s tax return for the relevant year. If this does not happen then the shareholders in the company must pay tax on this income. However, there are ways of streaming the tax liability over 7 years. By the shareholders paying tax on this income then the benefit of the 30% tax rate may be diminished,

If you have a trust we will be discussing planning strategies with you when we complete your 2010 tax return. However, if you plan to open a new business or plan to invest your money in a new asset please contact us so that we can devise a strategy that will suit your needs.

2010 PAYG Payment Summary Change

The 2010 PAYG Payment Summary includes a number of important changes, the main one being the reporting of reportable employer superannuation contributions. A reportable employer superannuation contribution is generally the contributions in excess of the mandatory 9% superannuation guarantee, which includes salary sacrifice. For employees between the ages of 70 - 75, and are still receiving superannuation contributions, all deductible employer contributions must be reported on the payment summary.

We hope you have enjoyed this article and found it informative and useful. Please contact us if you would like further explanation on any topics discussed in this article.


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.