Buying a new home before selling the old one

There are many different issues to be considered, and matters to be juggled, when buying a new home eg, financing, storage of furniture, etc – and timing, of course.

But a common issue is whether you should sell your existing home first and then buy – or buy first. (Most “experts” say you should sell first.)

But if you are caught in that situation (or choose to be in that situation) where you buy a new home first there is an important tax rule to consider.

And this centres on the capital gains tax (CGT) rule that you can’t have two CGT-free homes going for the same period or at the same time. 

And where you buy a new home before selling the old home you technically have two CGT-exempt homes running at the same time – for which, in principle, you cannot get a full CGT exemption when you later sell one or the other.

However, there is an important CGT concession that can help you in this case – and it is the “changing main residence concession”.

This broadly grants you a six month period in which both homes will be entitled to the full CGT exemption for your home. 

In particular, it allows you to claim a full CGT exemption on your original home provided you sell it within six months of buying the new home – even if you have lived in the new home as your main residence for much of that six month period.

In other words, it allows you a six month overlap period to treat both homes as your CGT-exempt main residence.

However, the practical application of the rules can be complex.

For example: 

You may think that this is one of those tax rules that the ATO does not pay a lot of attention to – and you may be right. Nevertheless, it is still the law of the land. 

Riding the market waves

Don’t let share market volatility get you off course with your superannuation investment strategy. 

Market volatility 

Market downturns can make anyone nervous, but sticking to your investment strategy is key.

If you move your investments to cash or a more conservative option after the market has fallen, you’re effectively locking in your losses. Decisions driven by fear are rarely the right ones, and acting impulsively can be costly. It is also very difficult (if not impossible) to correctly time the market, so if you’re planning to switch back to growth assets before the market recovers, this might see you miss out on the rebound.

A more optimistic view of a falling market is that your regular superannuation contributions are buying assets at a lower price. When the market eventually recovers, those assets purchased during the downturn can significantly increase in value. 

Don’t panic and stay the course

Riding the ups and downs of financial markets is an inherent aspect of investing.

Although market volatility can be stressful, particularly for those nearing or in retirement, it’s crucial to keep a long-term perspective and stick to your investment strategy (assuming it still meets your needs). Even those approaching retirement, or already retired, still have many years of investing ahead. 

And if like most people your superannuation benefits are invested in a balanced or growth option, diversification plays a key role in shielding your balance from extreme market swings. That in turn allows you to have a diversified position and be confident that your superannuation can stay the course over time.

For those in a large APRA-regulated fund, most funds have pre-mixed diversified options for you to choose from. Otherwise if you have your own SMSF, you’ll need to ensure your investment strategy factors in a range of requirements such as diversification, the risk and return in making investments, and so on. As trustee or director of your fund, you will need to manage this yourself or seek advice from a licensed financial adviser who can assist you in developing a compliant strategy that is tailored to your fund and members’ circumstances. 

But if market volatility continues to keep you up at night, it might be wise to check your investments and superannuation balance less often. By focusing on the long-term rather than daily fluctuations, you’ll have a clearer perspective on your financial progress without unnecessary worry.

The last word

As the investment saying goes, “it’s not about timing the market, it’s about time in the market”. The key takeaway is to stay patient, adhere to the fundamental principles of diversification and asset allocation, and as always, don’t hesitate to seek advice if you need it. 

Who is a spouse under the tax laws, and why does it matter?

While Australia doesn’t have a joint filing option for married couples, there are some aspects of your individual tax assessment that depend on your spouse’s income.

For example, your eligibility for the private health insurance rebate and your liability for the Medicare Levy Surcharge both take into account your spouse’s income. Other tax attributes affected by your spouse’s income include the senior and pensioner tax offset, the Medicare Levy reduction for families, the zone and overseas forces tax offsets, and the invalid and invalid carer offset.

Under Australian tax law, a spouse is a person (of any gender) with whom you were in a relationship that was registered under a prescribed State or Territory law, or not legally married, but who lived with you on a genuine domestic basis in a partnership as a couple.

So, spouses are either legally married or living in a de facto relationship under the same roof. Note the additional requirement for cohabitation for de facto couples, which is in itself evidence of the relationship.

Sounds simple enough, but here are some commonly asked questions about spouses:

What about overseas marriages?

Many marriages for Australian residents took place in other jurisdictions. The Marriages Act has reciprocal provisions and most overseas marriages are recognised in Australia.

What if my spouse is still a foreign resident?

Sometimes visa requirements prevent both spouses from entering Australia at the same time. Where this occurs and the parties are legally married, the foreign partner is regarded as a spouse. All their global income needs to be disclosed in the Australian tax return of the resident partner. Where the parties are in a de facto relationship they are not cohabiting and the foreign partner will not be treated as a spouse under the tax rules.

What if I don’t know my spouse’s income?

You might need to lodge by 31 October, but your partner runs a business and uses his tax agent’s extension to lodge by the following May. Or you and your partner may be going through a difficult separation and the communication process is far from ideal. Make your best estimate, based on what you know about their affairs. If you have acted in good faith you won’t be penalised for getting it wrong, although the Tax Office might adjust your return down the track.

What if my relationship lasted for less than a year?

Most people don’t start or finish relationships on 1st July. There is space on your tax return to indicate when you have started or finished a spousal relationship part way through the year of income. The Tax Office will pro-rate the various tax rebates or surcharges as necessary.

What if I am separated but not divorced?

Couples who are legally married but who subsequently separate continue to be spouses until their divorce is finalised. On the other hand, couples who were in a de facto relationship but who subsequently separate cease to be regarded as spouses from the time they are no longer cohabiting.

Does cohabiting need to be full-time for a couple to be regarded as being in a de facto relationship?

Some couples prefer to maintain their own respective households while engaging in a co-dependent intimate relationship with another person. They might spend a number of nights together at either one of their homes but also spend time apart, which gives them independence and makes their relationship work.

These things are a question of fact and degree. If the couple spend most nights together at one place or the other and conduct themselves as a couple they might be regarded as being in a de facto relationship.

If they were legally married this would not be an issue, as they would be regarded as each other’s spouse regardless of how much time they spend apart. Perhaps not the most romantic reason for popping the question, but marriage would sort out any tax uncertainty there might be.

Inheriting assets other than a home

Most people know that if they inherit a home and it is sold within two years of the deceased’s death, then they won’t pay any capital gains tax (CGT) on it.  And there are other ways an inherited home can be sold CGT-free.

But what about other inherited assets – such as a car, shares, vacant land – or even jewellery or artwork.

Well, for a start there is no CGT-free exemption for these assets if they are later sold by the beneficiary who inherits them (or if they are sold by the executor in the course of the administration of the estate). 

However, some such assets will be exempt from CGT on any later sale because they are an asset that is not subject to CGT in the first place. Typically, this will include an ordinary car – or even a vintage car.

Otherwise, most inherited assets other than “purely personal” assets (such as ordinary books, furniture and clothing, etc) will be subject to CGT on any later sale. And this includes assets that the deceased may have acquired before 20 September 1985 which would not have been subject to CGT if they had been sold during the deceased’s lifetime. 

Nevertheless, where a person is subject to CGT on an inherited asset, they will be deemed to have acquired it for the same cost that the deceased paid for the asset – in the case of assets that the deceased acquired after 20 September 1985. This means they will calculate any capital gain or capital loss by reference to that “deemed” cost.

On the other hand, if the deceased acquired the asset before that date they will get a cost equal to the asset’s market value at the date of death of the deceased – which usually means that there will be less CGT to pay on any sale of the asset.

In either case, the beneficiary gets the advantage of getting a “deemed cost base” for the asset for the purposes of calculating any CGT for an asset they acquire without having to pay anything for!

Furthermore, in the case of assets that the deceased acquired after 20 September 1985, if the combined period of ownership of the asset by the deceased and you as the beneficiary (plus the period when it was held by the executor) is greater than 12 months, then any capital gain you make is also usually entitled to the 50% discount to assess only half of the gain.

But if the deceased acquired the asset before that date, then the asset must have been owned by you (and the executor if relevant) for at least 12 months to be eligible for the CGT discount.

In the case of inherited shares, it will be necessary to work out the specific cost base of every share  – and this may be difficult if there have been shares acquired under a dividend reinvestment plan or share splits or amalgamations, etc on any restructure of the company. 

It should also be noted that while “purely personal” assets (eg, books, furniture, etc) won’t be subject to CGT on any later sale by a beneficiary (because like cars, they are generally exempt from CGT) there is a special category of personal assets known as “collectables” which are subject to CGT during the lifetime of the deceased and in the hand of the beneficiary.

And these collectibles include such things as artwork, jewellery, antiques and coins or medallions. 

But the key thing is that they retain their character as “collectibles” in the hands of someone who inherits – and therefore the special rules that apply to them also applies to a beneficiary who inherits them. For example, they have their own special rules to determine their cost in the hands of the original owner – which carries over to a beneficiary who inherits them.

Whether a person who inherits a “collectible” pays any attention to these rules (or even knows of their existence) is another matter. And the sale of a collectible is a hard thing for the ATO to chase up – as opposed to land.

But suffice to say, these CGT rules exist – and they are the law of the land.

Finally, if a beneficiary is a foreign resident of Australia for tax purposes and they inherit assets from a deceased person who was an Australian resident, then different rules will apply. 

Essentially, the deceased person will be deemed to have sold the assets just before their death and will be liable for CGT themselves in their final tax return. However, this rule is subject to important exceptions – such as for inherited land in Australia. 

So, dealing with inheritance of assets is not a straightforward matter. But it also affords the opportunity to plan and time things so as to reduce any potential exposure to CGT. 

And, we are to help in any stage of the process.

SMSF record keeping requirements

A key responsibility that SMSF trustees must adhere to is to keep accurate tax and superannuation records.

The benefits of good record keeping

As a SMSF trustee, the benefits of good record keeping will:

Even if you use a superannuation or tax professional to administer your SMSF, each trustee is responsible for good record keeping. This means each trustee could be fined if the appointed auditor tells the ATO that you as trustee have not been keeping proper records.

Minimum record keeping requirements

The ATO requires you to keep the following records for a minimum of five years:

You are also required to keep the following records for a minimum of ten years:

Information resources are available

If trustees or directors of a SMSF are unsure about what kind of things they should be recording, they can: 

As always, we are here to help if you need any further information about your SMSF reporting and record keeping requirements.

The importance of Tax Residency

Whether you are a resident of Australia or non-resident of Australia for tax purposes has significant consequences for you.

Primarily, if you are a resident of Australia for tax purposes you will be liable for tax in Australia on income you derive from all sources – including of course from overseas (eg, an overseas bank account, rental property, an interest in a foreign business etc).

On the other hand, if you are a non-resident of Australia for tax purposes, you will only be liable for tax on income that is sourced in Australia (including capital gains on certain property such as real estate in Australia).

And while there may be difficulty in determining the source of income in some cases, if you are a resident for tax purposes, the principle of liability for tax in Australia on income from all sources remains clear.

Resident of Australia for tax purposes 

So, what does it mean to be a resident of Australia for tax purposes? 

Well, broadly, it means you “reside” in Australia (as commonly understood), unless the Commissioner is satisfied that your permanent place of abode is outside Australia.

However, a recent decision of the Federal Court has shed some light on this matter – especially the often-misunderstood presumption that “connections with Australia” is all that counts.

“Connections with Australia”

The Federal Court case involved a mechanical engineer who was posted to Dubai for a period of six years, followed by a posting to Thailand, but who had continuous family ties to Australia (in that he financially supported his wife and daughters who were living in Perth).

Originally, the taxpayer was found to be a resident of Australia for tax purposes essentially because of his continuous ties to Australia and the fact that he did not establish personal ties overseas while he was living there (other than via his work commitments).

However, the Court found that “connections with Australia” was not the key test but rather the key matter was where one intended to treat as home for the time being, but not necessarily forever, ie, not necessarily “permanently”.

Likewise, it said that the matter of residency is worked out on income year by income year basis (ie, one particular year of income at a time) and it doesn’t mean a person has to have the intention of living in a particular location forever.

Among other things, the case may have implications for people who work overseas on a contract basis for periods of time, but still maintain family ties to Australia.

It may also mean that closer scrutiny will have to be paid to determine a person’s residency on a year-by-year basis and not just “locking” them into a residency or non-residency status from the beginning of any relevant change in their circumstances.

And of course, there is also the key issue of when in fact your residency status may change!

We are here to help

Suffice to say, if you find yourself in any such circumstances (eg, you undertake a foreign posting for a period or you decide to move overseas for some time but still maintain connections here), you will need to speak to us about your residency status – and the tax implications thereof.