Australian Tax Position for Canadian RRSP (Registered Retirement Savings Plans)

Canadian RRSPs receive favourable tax treatment in Canada. However, for Canadians who immigrate to Australia, the Australian taxation of Canadian RRSPs can be a complex and confusing area. Furthermore, the Canadian Revenue Agency frequently informs the ATO of withdrawals from Canadian RRSPs which has resulted in the ATO treating 100% of the withdrawal from the Canadian RRSP as taxable income in Australia in some instances.

What are the issues?

A Canadian RRSP is typically funded using capital, however in some cases RRSP contributions are tax deductible under Canadian tax law. On withdrawal from a Canadian RRSP typically the Canada Revenue Agency deducts tax at 15% for non-Canadian tax residents.

People with a Canadian RRSP may find that the ATO incorrectly seeks tax on 100% of the withdrawal from their RRSP even though a large amount of the withdrawal is capital, because of the way in which these payments are reported to the ATO by the Canadian Revenue Agency.

What is the correct Australian tax treatment?

The ATO does not view all Canadian RRSPs as foreign superannuation funds. The exact tax treatment depends on the precise terms of the Canadian RRSP.

Most main stream Canadian RRSPs are not foreign superannuation funds. This is principally because withdrawals can be made from RRSPs at times that would not be permitted under Australian superannuation legislation. Therefore, whilst RRSPs are “foreign” from an Australian tax perspective, they are not “superannuation” and consequently are not taxed as foreign superannuation funds.

The ATO takes the view that most Canadian RRSPs are foreign trusts. This means that on a lump sum withdrawal from the RRSP, the payment is apportioned between:

  • Income accumulated in the RRSP;
  • Capital gains accumulated in the RRSP; and
  • Corpus (or original capital) contributed to the RRSP.

The accumulated income and capital gains may include income and capital gains that have not been taxed in Australia in prior tax years. Therefore, effectively, the profit element in the RRSP is taxed in Australia, but the withdrawal of the original capital is not.

Temporary Residents of Australia

People who are in Australia on temporary visas should obtain Australian tax advice before obtaining permanent residency visa status in Australia. This is particularly the case for persons with Canadian RRSPs. Certain Australian tax advantages in relation to the taxation of foreign trusts are lost once a person changes their visa status from ‘temporary resident’ to ‘permanent resident’. Therefore, persons with Canadian RRSPs should seek Australian tax advice prior to applying for permanent residency with the Australian Department of Immigration and Border Protection.

Conclusion

The Australian taxation of Canadian RRSPs is a complex area. If you have a Canadian RRSP and plan to make a withdrawal, or have already made withdrawals, please contact Naomi Smith on 02 6279 5400 or nsmith@nexiacanberra.com.au .

Similarly, if you are in Australia on a temporary visa and plan to apply for a permanent residency visa, please request tax advice from us prior to changing your visa status.

We can also assist you if you have Canadian tax issues via our Network of accounting firms in Canada.

 

 

 

Bank Account Interest: Who Pays the Tax?

From time to time the ATO expresses its opinion on how certain tax laws should be interpreted.

In April this year the ATO released its opinion in Taxation Determination TD 2017/11 on the taxation of bank account interest.

The ATO focused on two areas:

  • bank accounts in children’s names, and
  • bank accounts in two or more names i.e. ‘joint accounts’.

While the answer to the question of who pays income tax on bank account interest may seem unequivocally clear — the account holders — in some situations the answer is not straightforward. Could, for example, the interest credited to an account held in two names be attributed entirely to the account holder falling in the lower tax bracket such as a child or stay-at-home spouse?

In order to determine who is liable for income tax on bank account interest, the ATO suggests we look beyond those merely named as account holders:

“for income tax purposes, interest income on a bank account is assessable to the person or persons who beneficially own the money in the account.”

The ATO will therefore seek to identify the real or ‘beneficial owners’ of the account, that is, the parties who enjoyed the benefits associated with the account, such as access to transaction-enabling facilities, secure storage of funds, and the source and use of the funds which passed through the account. That is not to say the ATO will disregard the identity of account holders, rather the ATO will consider factors in addition to strict legal title in order to determine who received the benefits of ownership. That is, the beneficial owner of a bank account may be a different party to the party named as the account holder or legal owner.

Children’s Accounts

Consider two scenarios where a bank account is opened in a child’s name: one where the child is the beneficial owner and one where the child is not.

Example 1 – account holder is beneficial owner

Five year-old Edwina has an account in her own name which was opened by her mother, Zelda.  Because of Edwina’s age, the bank requires Zelda to act as trustee over the account. Following the example set by her mother, Edwina is determined to build for herself a financial nest egg. This year, all of Edwina’s birthday money was deposited into the account. The bank has credited the account with $500 interest.

Despite being the only signatory to the account, Zelda has not deposited any of her own money into the account and has not used the funds in the account for her own purposes. Edwina is therefore the beneficial owner of the account and the interest income will form part of Edwina’s taxable income in the year in which the interest was credited.

At first glance this appears to allow Edwina to benefit of the $18,200 tax free threshold. Mindful that parents might exploit such an arrangement by channelling funds into children’s accounts, the government introduced anti-tax avoidance provisions that target interest income attributable to minors. The effect is that any interest attributable to Edwina, in excess of $416, will be taxed not at Edwina’s otherwise applicable marginal rate but at a special rate, as high as 66%.

Edwina must report $84 ($500 less $416) on her personal tax return as ‘eligible taxable income’. Note that despite being the account’s trustee, Zelda need not lodge a trust tax return in relation to the interest income derived from the account.

Example 2 – account holder is not beneficial owner

Fourteen year-old Freja has an account in her name which was opened by her father, Walter. Walter and Freja are both signatories to the account, but only Walter makes regular deposits and withdrawals, essentially to manage household expenses. This year the bank credited the account with $200 interest.

Under this scenario, Walter operates the account as if it were his own. Walter is therefore the beneficial owner of the account. Walter must include the interest credited to the account in his personal tax return in the year in which the interest was credited. The interest will be taxed at the marginal tax rates applicable to Walter.

Joint Accounts

Where an account is jointly held by two or more parties, the ATO presumes that any interest income credited to the account is attributable to the account holders in equal shares..

By applying the concept of beneficial ownership, the presumption may in some circumstances be rebutted. The ATO has determined that evidence in support of such a rebuttal can include ‘information regarding who contributed to the account, in what proportions contributions were made, the nature of the contributions, who drew on the account and who used the money (and accrued interest) as their own property. Evidence may also be provided that joint account holders hold money in the account on trust for other persons’.

Consider, for example, the situation where Nancy, an elderly nursing home resident, is the joint holder of a bank account with her nephew, Sid. Because of Nancy’s lack of mobility, Sid performs transactions on the account on Nancy’s behalf, depositing cheques payable to Nancy over-the-counter and making ATM withdrawals to provide Nancy with cash. Sid makes no use of the funds in the account for his own purposes, nor does he deposit his own funds into the account. Nancy is therefore the beneficial owner of the account.

Because Sid has no beneficial ownership of the funds on deposit, Nancy must declare all of the interest income credited to the account in her personal income tax return. The interest income will be taxed at the ordinary marginal rates applicable to Nancy.

Characterising an arrangement involving multiple parties as endowing one party with all of the benefits, and the others with none may not always be correct. To the extent that the benefits are divided among multiple beneficiaries, a degree of apportionment may be appropriate.

While ATO rulings are not legally binding on taxpayers, they give an indication of the kind of response taxpayers can expect from the ATO, particularly where bank account interest is excluded from a bank account holder’s income tax return.

Roger Karlsson

rkarlsson@nexiacanberra.com.au

Tax Consultant

28 September 2017

Superannuation Changes: Transitional CGT Relief for SMSF

SMSF trustees that were paying Transitional to Retirement Income Streams (TRIS) or an account based pension (ABP) with a balance of more than $1.6m should review the SMSF’s CGT position in light of the transitional CGT relief rules.

Summary of the New Superannuation Laws

Below is a summary of the new superannuation laws from 1 July 2017:

  1. TRIS

Until 30 June 2017, no income tax or CGT is payable by an SMSF on income derived by the investment of a member’s account balance where that income is used to fund a TRIS. From 1 July 2017, such income used to pay a TRIS will be taxed at 15%. Capital gains will be taxed at 15% where the asset has been held for less than 12 months. For assets held for at least 12 months, the one-third CGT discount will apply, reducing the effective CGT rate to 10%.

Some people who have no financial need for the TRIS may choose to discontinue their TRIS because the income on their account balance will be taxed whether or not a TRIS is taken.  By doing so, their superannuation assets are preserved to be used in retirement.

  1. ABP

Where a member’s ABP account balance exceeds $1.6m, the excess will need to be commuted to accumulation phase by 30 June 2017 or be paid out of the superannuation fund. Income on assets held in accumulation phase is taxed at 15%, as are capital gains where the asset has been held for less than 12 months. Accumulation accounts with assets held for at least 12 months attract the one-third CGT discount, which reduces the effective CGT rate to 10%. ABPs continue to pay no tax on the income and capital gains arising from the assets that are used to fund the ABP.

  1. CGT Elections

The CGT elections enable SMSF trustees who had part of the super fund in a TRIS or ABP at 9 November 2016 to elect for certain assets to be treated as if they were sold and reacquired for CGT purposes on 30 June 2017. The rules differ for SMSFs whose assets were segregated at 9 November 2016, compared with those funds that were using the proportionate method. The CGT election can be made on an asset by asset basis.  The election crystallises the capital gain on the SMSF assets, thus resetting the cost base at 30 June 2017. Also if the fund is partially in accumulation phase an additional election can be made to defer the payment of tax on unrealised capital gains that would be subject to tax as a result of the election to treat all assets as disposed of in the fund.

If this transitional CGT relief rule did not exist, SMSFs would have needed to sell all of their assets before 30 June 2017 in order to benefit from the 0% tax rate applying to SMSFs paying TRISs or ABPs. This could have resulted in flooding or distorting certain markets. The CGT election enables SMSF trustees to benefit from the 0% CGT rate until 30 June 2017 without the need to dispose of assets. However, the election will not be beneficial in all situations and therefore care should be taken when making the election.

Time Limit for the Election

The CGT Election must be made on or before the date that the SMSF’s tax return for the year ending 30 June 2017 is due for lodgement.

Should SMSF Trustees Make the CGT Election?

Whether an SMSF should make the CGT election depends on many factors including:

  • Whether the SMSF was using the segregated or proportionate method at 9 November 2016.
  • Whether there is an unrealised capital gain or capital loss on each asset.
  • The value of the assets.
  • Whether the assets will be sold within the next 12 months, because making the election also resets the acquisition date for CGT purposes.
  • Whether the SMSF has capital losses brought forward.

The circumstances of each SMSF will be different and therefore SMSF Trustees should seek  advice on whether they should make the CGT election for each of the SMSF’s assets. The SMSF’s assets should be reviewed on an asset by asset basis and also collectively; this could be a time consuming task.

Next Steps

If your SMSF was paying a TRIS or ABP and your account balance is over $1.6m at 9 November 2016, you will need professional tax advice on your SMSF’s CGT position before the due date for your 2017 SMSF tax return, on the appropriate course to take. Contact us for further information on the superannuation law changes and whether you should make the CGT election.

Naomi Smith is an Authorised Representative (No. 001 250 392) and Duescount Pty Ltd trading as Nexia Duesburys is a Corporate Authorised Representative (No. 001 243 884) of SMSF Advisers Network Pty Ltd AFSL 430062.

Australian and UK Estate Planning and the 87% Tax Rate

The application of Australian Capital Gains Tax (CGT) and UK Inheritance Tax (IHT) can lead to an aggregate tax rate of 87% following the death of a loved one. Such a high tax rate should cause with clients who have lived in both jurisdictions to obtain specialist advice before they die to implement effective tax planning. (more…)

Superannuation Tax Deductions Pre and Post 30 June 2017

The golden days of being able to claim large tax deductions for making contributions to a complying superannuation fund are over.  Not so many years ago, people could make a tax deductible $100,000 contribution, then the amount reduced to $50,000, then to $35,000 (applicable to 30 June 2017 for people 49 years and over), $30,000 for those under 49 years until 30 June 2017 and then $25,000 for everyone after 1 July 2017.

Yes, the tax deductible limit has reduced to 25% of the limit applying only a handful of years ago.  The high deductible limit was to encourage people to contribute to super and not be eligible for the age pension at retirement age; this was a long-term strategy not to have older Australians being a financial burden on the Government in their retirement.  That concept has been scrapped with concerns of what the superannuation contributions tax deduction is costing in the short term; after all, the Government can be in office for three years – budgeting for the future/long term age pension demands on future Governments is too far away.

My apologies for the cynicism but for many income earners, the $25,000 tax deductible limit after 1 July 2017 will be inadequate to fund a lifestyle in retirement for which they had hoped.  As mentioned in another article recently published in Canberra Tax Advisor, the non-concessional (non-tax deductible) annual limit reduces from $180,000 to $100,000 after 1 July 2017.  This further reduces some people’s capacity to build superannuation savings.

While such annual contributions are understandably beyond the average salary and wage earner, people in receipt of inheritances or gifts should not be restrained by these limits to contribute to their retirement savings.  If people cannot place such one-off amounts into a superannuation fund, the likelihood is that the amounts will be squandered, although reducing the home mortgage balance is a worthwhile option.

So people have until 30 June 2017 to make superannuation contributions of $30,000 or $35,000 – depending on their age as explained above – before 30 June 2017 after which time, the maximum deductible limit reduces to $25,000.

The same principles apply to people who are on salary sacrificing arrangements.  Consideration might be given to increasing additional superannuation contributions, above standard superannuation guarantee payments, to the higher maximum limits available this financial year; they have three months of this financial year to arrange this with their employers.  They should also ensure that they instruct their employers to reduce their salary sacrifice contributions after 1 July 2017 to avoid an excess contributions situation in future income years.

This article should be read in conjunction with my recent article in Canberra Tax Advisor on non-concessional superannuation deductions.

Michael Bannon

MBannon@nexiacanberra.com.au

Tax and Superannuation Partner

10 March 2017

Tax and Superannuation Strategies Before and After 1 July 2017

The changes to superannuation from 1 July 2017 will cause many people to re-think what they should be doing with their superannuation savings and pensions before that date.  At the time of writing, we have four months to implement valuable strategies.

One of the prominent changes to super after 1 July 2017 is the change to whether non-concessional (non-tax deductible) contributions can be made to a complying superannuation fund such as a retail or industry fund or to a self-managed superannuation fund (SMSF).

The making of non-concessional contributions serves at least two purposes.  The most obvious is to more quickly build superannuation savings.  Concessional (tax deductible) contributions are capped this year ending 30 June 2017 to $30,000 for people less than 49 years of age  or $35,000 if 49 years and over.

Non-concessional contributions of $180,000 may be made by 30 June 2017.  Alternatively, a maximum of $540,000 ($180,000 x 3) may be made by 30 June 2017 but no further non-concessional contributions may be made for the next two financial years (years ending 30 June 2018 and 2019). After 1 July 2017, the annual and three year limits reduce to $100,000 and $300,000 respectively.

For some people who have cash outside a super fund, consideration might be given to making a lump sum contribution subject to the above limits before 1 July 2017.  While having a lazy $540,000 might seem unusual, there may be situations where a person may have just sold a property or have inherited a share of an estate.

Remember that having savings in a super fund still represents a very tax effective environment with tax on income being only 15% whilst in accumulation phase (usually the time before pensions begin to be drawn).  In accumulation phase, the tax rate on capital gains is an effective 10%.

The second purpose of making non-concessional contributions is to build on the tax-free component of a person’s member’s account on their super fund.  Upon the member’s death, the tax-free component paid to a non-dependant, such as an adult child is not subject to tax.  In contrast, the taxable component of a death benefit paid to an adult child is subject to tax at 15% plus 2% Medicare levy.  Death benefits paid by a super fund to a spouse or child under 18 years are tax free.

The super changes are not without their traps.  People over 65 years can only make the annual non-concessional contribution cap of $180,000 before 1 July 2017 and must also satisfy the work test.  That test requires the person to be gainfully employed for at least 40 hours in a continuous 30 day period during the financial year.

As a means of restricting people to contribute to their super savings after 1 July 2017, the Government has spuriously stopped people with more than $1.6 million in super savings from making non-concessional contributions.  Therefore, this financial year is the last chance for those people to make non-concessional contributions.

This article has been restricted to making superannuation contributions before and after 1 July 2017.  A planned future article will deal with the $1.6 million account balance test, rolling amounts from pension phase to accumulation phase and changes to tax arrangements if a transition to retirement pension continues after 1 July 2017.

 

Michael Bannon

Tax and Superannuation Partner

28 February 2017

mbannon@nexiacanberra.com.au

Why Have a Will?

A will is one of the most critical documents that any person will complete in their lifetime. A will should never be regarded as a document set in stone.  Changes in circumstances such as health, marriage, divorce, a new child or grandchild or the acquisition of valuable assets such as property may be reasons to have a new will prepared. (more…)

RESEARCH AND DEVELOPMENT TAX INCENTIVE

As part of the Government’s strategy to promote innovation, from 1 July 2014, the Research and Development (R&D) Tax Incentive was improved.

However many eligible businesses are still not claiming the R&D Tax Incentive. One of the reasons is that many businesses do not know that they qualify for the R&D Tax Incentive. Many more do not understand how to claim the R&D Tax Incentive. Furthermore, numerous firms have shied away from claiming the R&D Tax Incentive because of fear of unscrupulous and high commission based fees. (more…)

Tax Consequences of Structuring a Transaction

As tax advisors we perform two types of work – we advise on the best course of action in relation to proposed transactions, and we help people deal with the consequences of transactions that have been carried out without having given proper consideration to tax issues.dghdfgh (more…)