Demolishing CGT liability

I BOUGHT a property in an inner suburb in 1994 for $240,000 and rented it out until July 2001. In April 2002, it was demolished and a new house, which cost $420,000, was built. It has been my principal residence since October 2002. Given that the house was demolished, what was the value of the property on which any capital gains tax will be calculated when the house is finally sold? What is the CGT event date the tenant departing, the demolition of the house or my moving in? If the house was sold now for $800,000, what CGT liability would exist? J.H.

From what you tell me, your CGT cost base should be $240,000 plus the demolition costs plus the $420,000 used to build the new house. The ATO's Interpretive Decision ID 2003/466 states: Where an original dwelling on the land is demolished or destroyed and a new dwelling is constructed, the exemption is for the shorter of four years before the new dwelling becomes their main residence or the period from when the original dwelling ceased to be occupied.

I read that as saying that your period of exemption from CGT on sale begins when your tenant moves out and you begin demolishing and then rebuilding your main residence. When you sell, the seven years or so that the house was rented for will represent the taxable portion of your assessable capital gain, apportioned over the length of time you own the house before selling. However, in complex and high-value matters such as this, you should always talk to your tax accountant.

Shipping super overseas

MY SISTER is an Australian citizen who married an American and established her own business in the US in 2006. She has still retained her Australian citizenship and has a superannuation account with AMP Superleader Fund. Would she be able to transfer her AMP super (the preserved benefit is approximately $11,000) into her US super fund? If not, what are her other options (she was born in 1966)? My sister may hold dual citizenships but she may decide to live in the US permanently and would want to consolidate her super. How could she do this? Y.S.

Leaving the country permanently is no longer a condition of release for preserved benefits. (Too many Australians were taking a holiday in NZ, claiming permanent departure and then withdrawing their super!) There are a dozen or so conditions of release, the most common ones being retirement after preservation age (at age 60, in your sister's case) and reaching 65 while still working.

Your sister can reduce the costs in her super fund if she chooses to opt out of life insurance, if this is what she is buying within her super fund. However, she should first determine whether she needs life cover (does she have young children? If so, is it cheaper to buy life cover through her super fund here than to buy it in the US?)

An example in the SuperLeader brochure shows an annual fee of 1.58 per cent plus $76.55 a year, amounting to a weekly fee of $4.81 for your sister's $11,000. For a small amount such as this, she will probably pay lower fees in an industry fund, although I note that one industry fund's balanced option was the worst-performing over 2008-09 with a 24 per cent loss, so lower fees do not guarantee higher returns.

Transfer in vain

SOME time ago I transferred $1000 to my partner's super account to enable her to receive the $1500 Government contribution. When the yearly statement arrived, there was no Government contribution. When questioned, the fund advised that the money had come from my account and did not meet the ATO guidelines. The ATO's advice was the same. I therefore feel the advice you gave in a recent column could be misleading, or at least open to misinterpretation. P.S.

You refer to a letter a few weeks ago in which a reader asked If I give (my daughter) $1000 as a lump sum payment to put in her super ..., to which the answer was: Yes, your daughter can take your gift and contribute ...

It's a good reminder that to get a co-contribution, the amount you contribute has to be a personal (non-concessional) contribution and not a salary sacrifice (concessional contribution), nor a transfer from someone else's account.

There's more to life policies

YOU recently responded to an inquiry concerning the income tax consequences of surrendering a life policy. You properly advised that there is generally no tax problem after 10 years. However, I am concerned others may not realise the possible impact for a pensioner or holder of a Commonwealth Health Card. The current treatment of conventional life insurance policy by Centrelink is that upon withdrawal from a policy (whether by surrender or on maturity) the difference between the surrender/maturity value and the sum of the price and the premiums paid is treated as income over the following 12 months. At least two cases have gone before an Administrative Appeals Tribunal arguing the proceeds from the life policies are not income and have been successful for the pensioners concerned. Nevertheless, Centrelink ignores the tribunal decisions because a court case is necessary to set a precedent it is obliged to follow. P.P.

The previous writer did not say he or she received an age pension, saying instead there was no desperation for the money. But you are quite right in that Centrelink counts the growth of such an investment as income for 12 months after cashing. (For details, search for 4.3.9.20 Income from Life Insurance Products at facs.gov.au.) I believe, after some public confusion, the subject was finalised in 2005 in a case before the president of the AAT and there have since been no further cases.

The topic has a fairly low profile because the amounts are usually quite low. The reasons for this are:

The writer, in this case, had two 43-year-old policies and I suspect the original sum assured was probably no more than $1000-$5000, as was usually the case back then;

Whole-of-life and endowment policies typically see a large slice of the premium go to provide life cover and only the remainder goes into the savings element that one eventually withdraws;

The earnings on that savings element are historically low, which was one of the reasons the products fell out of favour in the 1970s and 1980s (current bonus rates are at 1 per cent to 2 per cent);

However, Centrelink counts the growth above total premiums over those 43 years (including the money going to pay for life cover); and

This is then subject to the taper rate of 40 cents in the dollar, rising to 50 cents after September (not July, as many readers pointed out following a recent typo, thank you) for new pensioners and those who get a higher pension under the new rules.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: bank ombudsman 1300 780 808; pensions 132 800.